Results

• 1QFY15 results came in with revenue of RM186.5m (+60.7% YoY, -3.4% QoQ) and earnings of RM19.6m (+19.7% YoY, -2.7 QoQ).

Deviation

• 1Q earnings made up 20.7% of our full year estimates (21.2% of consensus) which we deem inline. Traditionally, 1Q tends to be the slowest quarter of the year. To illustrate, last year, 1Q made up 21.3% of the full year earnings with subsequent quarters (particularly in 2H) posting much stronger numbers.

Dividends

• None declared. Usually in 2Q and 4Q.

Highlights

• Higher topline but lower margins. Margins saw a compression YoY with EBIT and net levels at 15.1% and 10.5% respectively (FY14 comparatives at 19.4% and 14.1%). This was due to (i) higher proportion of open tendered jobs and ;(ii) general rise in operating cost.

• State election boost for jobs. Job wins for 1Q amounted to RM105m which includes an access road and water intake project in Mukah. We have assumed RM500m in new job wins this year. In our view, job wins are likely to accelerate in 2H as the timeline for the Sarawak state elections dawns closer. Running up to the state elections, which must be held before mid-2016, we expect contract flows to pick up in efforts to boost development and create a “feel good” factor amongst voters.

• What’s on the cards? The 11MP which was unveiled yesterday focused on rural developments (e.g. roads and utilities) in the rural areas of East Malaysia. Apart from that, the Pan Borneo Highway (RM27bn) is also in the cards. We expect HSL to land a slice of these jobs.

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: RM2.12

• We maintain our BUY rating on HSL with the key catalysts being the impending Sarawak state elections which should see a surge in contract flows.

Valuation

• TP is raised from RM2.07 to RM2.12 as we roll over our valuation horizon from FY15 to mid-CY16 at an unchanged 12x P/E target.

Source: Hong Leong Investment Bank Research - 22 May 2015