Results

9MFY13 earnings dipped by 3% to RM63.0m (11.4 sen/share), missing estimates by making up 62% and 66% of ours and consensus’ estimates respectively.

Deviations

Due to weak construction progress billings.

Dividends

None. Usually declared in 2Q and 4Q.

Highlights

3Q results… 3Q revenue was weak, declining by 15%/7% YoY/QoQ to RM130.1m. The decline was due to slower construction billings as the division has a number of major projects in their start-up phases. Despite the decline in revenue, EBIT margin held steady at 21%, resulting in a smaller decline of 8% YoY (QoQ: -7%) in EBIT to RM26.8m. Overall, 3Q PATAMI fell by 8% (both YoY and QoQ basis) to RM20.8m.

9M results… 9M revenue declined by 8% to RM405.6m. Growth in property revenue by 90% to RM38.7m, mitigated the impact of slower construction billings, which contracted by 13% to RM366.8m. As 1HFY13 earnings were flat, the soft 3Q results led to the fall in 9M PATAMI by 3% to RM63m.

Outlook is good… After many years of earnings growth, HSL may see flat or a dip in earnings for FY13. Management expects the timing issue to be resolved over the next 6 months and the claimable progress will be reflected next year. Despite the soft earnings, outlook and prospects for HSL remains bright as it will benefit from the Government’s development plan in Sarawak.

The company is in the advanced stages of presenting its bid for Package 2 of the Kuching Wastewater project. Meanwhile, it will be busy executing its outstanding order book of circa 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

FY13/14 earnings slashed by 9.1%/3.9% respectively to reflect slower construction progress.

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

We rollover our valuation to 12x FY14 earnings but with a lower Target Price of RM2.16 from RM2.17 previously.

Source: Hong Leong Investment Bank Research - 29 Nov 2013