Results

• 3QFY14 results came in with revenue of RM 155m (+19% YoY, +11% QoQ) and PATMI of RM21m (+3% YoY, +13% QoQ). For the cumulative 9M period, PATMI came in at RM57m, declining 10% YoY.

Deviation

• 9M PATMI made up 73% of our full year estimates, which is within expectations. The numbers however, disappointed consensus at only 62%.

Dividends

• None declared. Expect final dividend in 4Q.

Highlights

Orderbook levels still healthy. Contract flows to HSL appears to have moderated YTD with RM300m secured. Despite this, its orderbook remains healthy at RM1.1bn implying a decent 2.2x cover on FY13 construction revenue. This follows from strong job wins at RM628m last year being carried forward.

...pick up expected. Budget 2015 saw an allocation of RM4.5bn for rural development, with a focus on East Malaysia. The key components are RM943m for rural roads, RM1.1bn for electricity connection and RM394m for water supply. A major boost for East Malaysia will be the implementation of the Pan Borneo Highway (RM27bn), stretching 936km in Sarawak and 727km in Sabah. Sarawak based contractor such as HSL are in a prime position for the former stretch.

Wastewater Phase 2 to come. Phase 1 of the Kuching Wastewater System (RM452m) is close to completion (targeted 1Q15). We gather that Phase 2 (RM800m) is at a very advanced stage to be rolled out. HSL has the Letter of Intent to undertake Phase 2 and materialisation to an award would boost its orderbook by 73%. The award of Phase 2 has been long delayed due to financing issues but this has been resolved.

Eyes power plant job. HSL (in a JV with foreign partners) is looking to undertake a 350MW gas fired plant in Bintulu (RM1bn). HSL’s role will primarily be on the civil works, estimated at RM200m.

Risks

• Slow orderbook replenishment, execution delays and rising material prices.

Forecasts

• Unchanged as the results were inline.

Rating

HOLD TP: RM2.07

• We continue to like HSL as a proxy to the rapid developments in Sarawak and given its strong execution track record. However, share price appreciation of 7% in the last 2 weeks has narrowed our potential upside to only 6% (total potential return of only 8%). As such, we downgrade our rating to HOLD and advise to accumulate at lower levels.

Valuation

• TP of RM2.07 is based on an unchanged 12x FY15 earnings, reflecting 1 standard deviation above mean.

Source: Hong Leong Investment Bank Research - 1 Dec 2014