News

• Wins substation contract. HSL announced that the consortium between itself and Larsen & Toubro Ltd has been awarded the RM280.9m Samalaju Substation Establishment project in Bintulu from Sarawak Energy. The scope of works to be undertaken by HSL includes earthworks, pilling, civil infrastructure works, building and M&E works valued at RM58.2m.

Comments

• Good start but more needed. This is the first job win that HSL has announced this year. With this job at hand, we estimate HSL’s orderbook to currently stand at RM658m, translating to a rather thin cover ratio of 1.1x on FY15 construction revenue. Owing to slow job wins last year, HSL’s orderbook has been on a declining trend from RM860m in 2Q to RM770m in 3Q and RM600m in 4Q. As such, we feel that HSL needs to significantly beef up on job wins to ensure a greater degree of earnings visibility.

• Hopeful for the Pan Borneo kicker. One of the potential sizable jobs on the cards is the Sarawak Pan Borneo Highway. The 70:30 HSL-DMIA JV is amongst the 17 prequalified consortiums for the RM16bn Sarawak Pan Borneo Highway (PBH) which will soon roll out 10 packages. DMIA is an unlisted Peninsular based Bumiputera contractor that has completed several road works in Malaysia and India. Given the swampy terrain of Sarawak, HSL will be able to leverage on its marine engineering expertise to execute the job. Securing a package of the PBH alone (assuming RM1bn at 70% stake), would more than double HSL’s orderbook.

Risks

• Weak orderbook replenishment is the key risk

Forecasts

• No changes to our forecast as YTD job wins of RM58m are within our full year replenishment target of RM500m.

Rating

Maintain HOLD, TP: RM2.04

• We acknowledge that HSL is a well-managed construction outfit with a clean balance sheet (RM0.19 net cash/ share). However, given its thin orderbook level, we are not compelled to buy at current levels.

Valuation

• TP of RM2.04 based on an unchanged 14x FY16 earnings. The premium valuation ascribed is to reflect the expected upswing in Sarawak job flows from the impending state elections.

Source: Hong Leong Investment Bank Research - 1 Mar 2016