Results

1QFY13 earnings dipped slightly by 1% to RM19.5m (3.51 sen/share), making up 20% of ours and consensus’ estimates.

Deviations

Historically, 1Q results make up 18-20% of full year profits. Hence, we consider earnings to be largely in line.

Dividends

None. Dividends usually declared in 2Q and 4Q.

Highlights

YoY… Revenue dipped by 3% due to slower construction activities as annual order book replenishment in the past 3 years remained constant at RM300-500m. On a brighter note, property billings picked up and will be a key contributor to HSL’s overall profitability in the future. EBIT margin remained flattish and healthy at 18%. Overall, earnings dipped slightly by 1% to RM19.5m

QoQ… Due to seasonality, revenue fell by 16%. However, property division posted sequential growth. Overall, sequential earnings contracted by 25%.

Earnings visibility… YTD, HSL has secured RM153m worth of projects, making up 31% of our RM500m order book replenishment assumption for FY13. Outstanding order book still remains healthy at RM1.05bn, which translates to ~1.8x FY12’s construction revenue and ~0.9x order book-tomarket cap ratio.

Improved newsflow… Despite the soft start, we believe that HSL will benefit from the anticipated increase in development projects in Sarawak. Hence, this may potentially increase HSL’s contract win for the year and may exceed our estimate of RM500m jobs win for FY13.

Risks

Execution risk; Regulatory and political risk; Rising raw material prices; and Unexpected downturn in the construction sector.

Forecasts

Unchanged

Rating

HOLD In view of less than 10% upside from our Target Price, we downgrade HSL to a HOLD call.

• Positives: (1) New contract wins; (2) Growing property development contribution.
• Negatives: (1) Failure in securing sizable contracts to replenish order book.

Valuation

• Maintain Target Price of RM2.09 based on unchanged 12x average FY13-14 earnings.

Source: Hong Leong Investment Bank Research - 23 May 2013