Results

FY13 earnings dipped by 6% to RM85.2m (15.4 sen/share), missing our estimate by making up 92% of full year forecast but largely in line with consensus’ estimates by making up 95% of forecasts.

Deviations

Due to weak construction progress billings.

Dividends

Net dividend of 1.8 sen/share declared (2Q: 1.2 sen/share), hence bringing full year payout to 3 sen/share, translating to a payout ratio of ~20% and matching FY12’s payout.

Highlights

4Q review… 4Q revenue shrank by 11% YoY, but grew by 10% QoQ to RM142.9m. The decline in revenue was mainly due to its construction division. Overall 4Q earnings fell by 14% YoY but grew by 7% QoQ to RM22.2m (4.0 sen/share).

FY13 review… FY13 revenue dipped by 9% to RM548.4m due to slower construction billings which contracted by 13% to RM500.9m. On the other hand, Property revenue grew by 75% to RM47.6m. Going forward we believe that HSL will continue to grow its Property division. Overall, earnings fell by 6% to RM85.2m (15.4 sen/share).

For FY13, HSL has secured RM628m in new projects, up from RM525m in FY12, which is within their RM600m-800m annual order book replenishment target. It has been a while back since HSL posted a dip in earnings growth. Despite that, we believe that the outlook remains bright for HSL as it will benefit from the Government’s planned infrastructure development in Sarawak.

Meanwhile, the company will be busy executing its outstanding order book of circa RM1.2bn, translating to 2.4x FY13’s construction revenue and ~1.2x order book-tomarket cap ratio.

Risks

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

Forecasts

FY14 earnings slashed by 9.0% to RM95.4m from RM104.8m previously to reflect slower construction progress while introducing FY15 forecast.

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

Due to lower forecasted earnings, Target Price has been reduced by 9.3% to RM1.96 from RM2.16 previously based on unchanged 12x FY14 earnings.

Source: Hong Leong Investment Bank Research - 28 Feb 2014