Results

1H14 earnings declined 16% yoy to RM35.4m (6.43 sen/share), and made up 37% of both HLIB and street’s full year forecasts.

Deviations

1H14 results were dragged down by a seasonally weak 1Q, which historically make up just 17-20% of full year profits.

Given strong sequential improvement in 2Q14 earnings (+16% qoq) and expectations of continued earnings growth in 2H14, we consider 1H14 earnings to be in line.

Dividends

1.2 sen dividend declared in 2Q14.

Highlights

2Q review… 2Q revenue came in at RM140.2m (+21% qoq, flat yoy). The construction division saw sequential growth in revenue and earnings, which more than offset the decline in earnings contribution from the property segment. This also led to overall 2Q earnings rising 16% qoq, but down 16% yoy due to timing differences.

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

Earnings contribution from the property development segment declined due to lack of new launches in 1H14, which saw just RM30m of new commercial units launched in Eden Centre in Kuching. We understand there will be significantly more new launches to come in 2H14, including high-end semi-d units from its premium gated community La Promenade as well as industrial properties.

We estimate that HSL’s outstanding order book is circa RM1.1bn, which translates to ~2.2x FY13’s construction revenue and ~1.0x 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 in 2H14.

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 incomerelate 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 - 28 Aug 2014