News

The Star reported that the Kumpulan Nishimatsu-Hock Seng Lee (KNH) consortium is in the final stages of negotiations with Sarawak state authorities on the Kuching centralised wastewater management system (KCWMS) project package 2 contract.

As a turnkey contractor, the KNH consortium is currently at the tail-end of completing the RM530m package 1 at 92.6% completion.

HSL corporate affairs director said that since the consortium has mastered the technical expertise in implementing package 1, it is in good position to secure package 2 for project continuity and cost-effectiveness.

In addition, HSL has tendered for several other projects. Based on records, the group had a very high success rate in bids for infrastructure projects with marine engineering and mass reclamation components, as these were its specialised expertise. HSL has secured a total of RM129m worth of new contracts this year.

Highlights

Given that HSL’s newly secured order for the year of RM129m is 21.5% of our FY14 order book replenishment assumption of RM600m, additional new contracts secured would be positive towards reaching our assumption.

Moreover, depending on the potential amount from package 2 of KCWMS (which could be relatively sizeable to HSL in view of RM530m package 1), it may exceed our assumption for FY14.

We remained positive about the company in securing more new contracts given its niche in Sarawak as well as marine engineering and mass reclamation. However, we are maintaining our earnings forecasts for now, pending actual awards.

We estimate that HSL’s outstanding order book is circa RM1.3bn, which translates to ~2.5x FY13’s construction revenue and ~1.2x 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 at RM2.18 based on unchanged 12x FY15 earnings.

Source: Hong Leong Investment Bank Research - 6 May 2014