News

Secured a RM228m contract for the construction of an 18- storey commercial building with 2-level basement at Petra Jaya, Kuching, from Eastbourne Corporation Bhd. The duration of the contract is 30 months and is expected to be completed by 1QCY16.

Highlights

Sizable contract… The latest project secured marks HSL’s 3rd major contract win for FY13. The value of the contract is sizable, making up ~40% of FY12’s construction revenue and ~23% of its previous outstanding order book of ~RM1bn.

RM381m secured YTD… YTD, HSL has secured RM381m worth of contracts, making up ~76% of our RM500m order book replenishment assumption for FY13.

Potential to exceed expectations… Against the backdrop of increased SCORE developments, we believe that order book wins for FY13 may surpass our expectations and also exceed management’s target of RM600m. However, we rather remain conservative for the time being.

4.1 sen/share… Assuming a PAT margin of 10%, this project will translate to ~4.1 sen/share (FD: ~3.9 sen/share) for HSL.

Jobs visibility… We estimate the latest outstanding order book to be ~RM1.2bn, translating to ~2.1x FY12’s construction revenue and ~1.1x order book-to-market cap ratio.

Risks

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

Forecasts

FY13 and FY14 earnings raised by 2.7% and 5.1% respectively due to increased property development profits and timing of order book recognition.

Rating

BUY

We continue to like HSL for its well-managed construction outfit and strong balance sheet. We believe that the company will be a key beneficiary of Sarawak’s development projects. In view of slightly >10% total upside from our current Target Price, we upgrade HSL to a BUY call.

Positives: (1) New contract wins; (2) Growing property development contribution; (3) Securing recurring incomerelated projects.

Negatives: (1) Failure in securing sizable contracts to replenish order book.

Valuation

Due to higher forecasted earnings, Target Price raised by 3.8% to RM2.17 from RM2.09 based on unchanged 12x average FY13-14 earnings.

Source:Hong Leong Investment Bank Research- 1 Jul 2013