Results

• 2QFY15 results displayed revenue of RM149.6m (+7% YoY, -20% QoQ) and earnings of RM17m (-10% YoY, -13% QoQ).

• Cumulative 1H earnings summed to RM36.7m, an increase of 4% YoY.

Deviation

• 1H earnings made up 39% of our full year forecast and 40% of consensus which is below expectations.

• While 1H revenue was inline (51% of forecast), the shortfall stemmed from lower than expected margins. PBT margin contracted YoY from 18.5% to 14.6% which we understand was due to: (i) higher proportion of open tendered jobs; and (ii) general rise in operating cost.

Dividends

• An interim dividend of 1 sen was declared vs. 1.2 sen last year. We read this slight dividend reduction as a sign that HSL expects the operating environment to remain challenging going forward.

Highlights

• More job wins needed. HSL has managed to replenish its orderbook by RM216m YTD (54% of our RM400m full target). This brings its orderbook to RM860m which implies a thinning cover ratio of 1.5x against FY14 construction revenue. Unless HSL can swiftly bump up its orderbook, an earnings decline this year would be inevitable. Recall that last year, HSL’s orderbook replenishment (slightly above RM300m) also fell short of its burn rate (i.e. RM573m).

• Hopeful for an election boost. We reckon that job wins could potentially pick up as the timeline for Sarawak state elections draws closer. Running up to the state elections, which must be held before mid-2016, we expect contract flows to gain traction in efforts to boost development and create a “feel good” factor amongst voters.

Risks

• Slower than expected orderbook replenishment is the key risk.

Forecasts

• Our FY15-16 earnings are cut by 19-20% as we price in lower construction margins.
• We now project FY15 earnings to come in flat YoY at RM77m.

Rating

Downgrade to HOLD, TP: RM1.75

• We acknowledge that HSL is a well-managed construction outfit with a clean balance sheet (RM0.16 net cash per share). However, given its flattish earnings outlook (3 year CAGR: 3%), we are not compelled to buy at current levels.

Valuation

• Following our earnings cut, our TP is reduced from RM2.12 to RM1.75 which is based on unchanged 12x FY16 earnings.

Source: Hong Leong Investment Bank Research - 27 Aug 2015