Results

1Q14 earnings dipped by 26% qoq and 16% yoy to RM16.4m (2.97 sen/share), made up 17.2% and 16.8% of HLIB and street’s full year forecasts, respectively.

Deviations

Historically, 1Q results make up 17-20% of full year profits. Hence, we consider earnings to be in line.

Dividends

None. Dividends usually declared in 2Q and 4Q.

Highlights

1Q review… 1Q revenue shrank by 19% qoq and 14% yoy to RM116.0m. The decline in revenue was mainly due to its construction division. Overall 1Q earnings fell by 26% qoq and 16% yoy to RM16.4m (3.0 sen/share).

The dismal performance of the construction segment was mainly due to lower progress claims of construction works due to timing and nature of the contracts during the quarter.

While the property development segment’s contribution remains small, yoy improvement in terms of turnover (+6.0%) and EBIT margin (+1.0-ppt) was encouraging.

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.

HSL will continue to pursue projects that draw on its core strengths in infrastructure works especially those requiring marine engineering aspects. Activities in the SCORE region will remain a significant source of new construction contracts.

Meanwhile, the government’s efforts to improve Sarawak’s infrastructure and amenities available to the rural communities are initiatives which generate further opportunities for HSL.

HSL’s property development segment has launched a few residential developments in 2013 and will have a range of products to launch including residential, commercial and industrial development in 2014.

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 FD EPS.

Source: Hong Leong Investment Bank Research - 23 May 2014