Results

1HFY13 earnings inched up by 0.2% to RM42.1m (7.6 sen/share), making up 42% and 43% of ours and consensus’ estimates respectively.

Deviations

We are expecting sequentially stronger earnings in 2HFY13. Hence, we consider results to be in line.

Dividends

Net dividend of 1.2 sen/share declared, higher than previous year’s corresponding payout of 1.05 sen/share. Dividends usually declared in 2Q and 4Q. Ex-date on 13 Sep-13, payment on 8 Oct-13.

Highlights

YoY… 2Q revenue dipped by 7% to RM140m, as the construction division slowed down by 16% to RM120m, on timing issue for several projects that are either in the final stages or just starting-up. On the other hand, property division saw its revenue grow by 148% YoY to RM20m, driven by sales of Eden Fields 2 and ‘Bahamas’ Samariang Aman 2 developments. EBIT margin expanded by 190 bps to 21%, led by property margin expansion. Overall, despite revenue contraction, earnings were up slightly by 1% to RM22.6m (4.08 sen/share).

QoQ… 2Q revenue grew by 4%, whereby the increase in property billings mitigated the slowdown in construction revenue. With EBIT margin expanding to 21% from 18%, HSL posted sequential earnings growth of 16%.

1HFY13… Revenue shrank by 5% to RM276m as construction billings for 1HFY13 was weak which fell by 11% to RM248m. During the same period, property revenue doubled to RM28m. Overall, stronger performance in 2QFY13 results saw 1HFY13 earnings inching up by 0.2%.

Earnings visibility… YTD, HSL has secured RM381m worth of projects, making up 76% of our RM500m order book replenishment assumption for FY13. The company is gunning for the second phase of the Kuching Wastewater project which could be worth much more than Phase One’s value of RM452m. The first phase is already commissioned successfully. HSL has an outstanding order book of RM1.2bn, which translates 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

Unchanged.

Rating

BUY

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

Maintain Target Price of RM2.17 based on unchanged 12x average FY13-14 earnings.

Source:Hong Leong Investment Bank Research- 29 Aug 2013