Investment Highlights

• We maintain our forecasts, HOLD call and FV of RM1.25 based on 10x FY19 EPS, in line with our benchmark forward target P/E of 7-10x for small-cap construction stocks.

• HSL’s 1HFY18 net profit came in at only 44% and 43% of our full-year forecast and full-year consensus estimates respectively. However, we consider the results within expectations as we expect stronger quarters ahead with key construction projects gathering momentum.

• At present, the completion of these key projects stands at:
  1. 30% for the RM1.2bil work package for the Pan Borneo Highway (total value for the work package is RM1.7bil, HSL has a 70% share);
  2. 18% for the RM333mil Miri Wastewater Management System; and
  3. 5% for the RM563mil Kuching City Central Wastewater Management System (Phase 2) (total contract value is RM750mil, HSL has a 75% share). Collectively, these three jobs make up two-thirds of HSL’s currently outstanding construction order book of RM2.5bil. Our forecasts assume job wins of RM250mil annually in FY18-20F. So far in FY18F, HSL has only secured one key contract worth RM101.2mil for the construction of Maktab Rendah Sains Mara in Bintulu, Sarawak.

• 1HFY18 net profit grew by a third YoY thanks largely to stronger construction profits as the three key projects started to contribute more significantly, coupled with a slight improvement in property profits.

• We remain cautious on the outlook for the local construction sector. As local contractors compete for a shrinking pool of new jobs in the market, they tend to undercut each other, resulting in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector.

• We believe HSL will be able to ride out the current downturn in the local construction sector relatively better than its peers, given its substantial order backlog that should keep it busy over the next 3-4 years, coupled with its ability to compete under an open bidding system.

Source: AmInvest Research - 16 Aug 2018