Results

• 4QFY14 posted revenue of RM193m (+35% YoY, -24% QoQ) and PATMI of RM20m (-9% YoY, -6% QoQ).

• Full year FY14 PATMI amounted to RM77m (-10% YoY).

Deviation

• The results were spot on with full year PATMI at 99% of our forecast but disappointed consensus at only 89%.

Dividends

• Final dividend of 1.6 sen was declared, brining full year sum to 2.8 sen (FY13: 3.4 sen).

Highlights

• Margins contracted. EBIT margin compressed from 20.9% to 17.1% YoY due to labour shortages as well as unfavourable exchange rates impacting the cost of imported plant and machineries.

• Needs to add on more. FY14 witnessed a moderation in contract flows with slightly above RM300m secured (FY13: RM628m). Its orderbook currently stands at RM950m, implying a cover of 1.7x on FY14 construction revenue.

• State election boost? The Sarawak state elections must be held before mid-2016 (the last elections was in April 2011). Running up to this, we expect to see the momentum of contract flows pick up in efforts to boost development and create a “feel good” factor amongst voters.

• 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 84%. The award of Phase 2 has been long delayed due to financing issues but this has been resolved.

Risks

• Slower than expected orderbook replenishment is the key risk. HSL’s orderbook replenishment has lagged behind its burn rate for the last 3 years.

Forecasts

• Unchanged as the results were inline.

Rating

BUY TP: RM2.07

• While there are no changes to our forecasts, we upgrade our rating from Hold to BUY given that the share price weakness earlier this year has given sufficient upside to start accumulating. More job flows, fuelled by developments at SCORE and the impending state elections are key catlysts.

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 - 2 Mar 2015