News

• Wins wastewater contract. The consortium of HSL and Kumpulan Nishimatsu has been awarded Package 2 of the Kuching City Central Wastewater Management System worth RM750m. HSL has a 75% stake in the consortium which brings its stake in the job to RM563m.

• Scope of works. The job scope entails construction of the wastewater treatment plant, lines, connections, equipment, related buildings and M&E works which is scheduled for completion in 6 years. This is the single largest contract that HSL has managed to secure in its history.

Comments

• Significant orderbook boost. With this contract in the bag, HSL’s job wins amounts to RM621m YTD. This is a stark improvement considering that it is only in 1Q vs RM250- 300m secured for the entire FY15. We estimate HSL’s orderbook to stand at RM1.2bn, doubling from the RM600m level in 4QFY15. Earnings visibility has certainly been enhanced with its orderbook cover ratio at 2x on FY15 construction revenue.

• Better margins than previous package. To recap, HSL was awarded Package 1 (RM452m) of the same wastewater project back in Oct 2008 which was completed last year. The difference this time around is that HSL is now undertaking the main contractor role as opposed to a subcontractor previously. As such, we opine that margins for this recent package are likely to be higher than the previous one.

• Pan Borneo will be the next kicker. Another sizable job in the pipeline is the Pan Borneo Highway (PBH) which saw its 1st package awarded last week. HSL in a JV with Peninsular based Bumiputera contractor DMIA are amongst the 16 contenders vying for the remaining 9 packages. We reckon that HSL has an edge given its marine engineering expertise which will come in handy whilst working on Sarawak’s swampy terrain. Assuming it secures a PBH package worth RM1.4bn (similar size to the recent one), this would add RM980m to its orderbook (based on a 70% stake), boosting it by another 80% to RM2.2bn.

Risks

• Risk of its weak orderbook replenishment has now abated with this sizable contract win.

Forecasts

• We raise FY16 job wins target from RM500m to RM1.5bn. This increases our FY16-17 earnings forecast by 8% and 18% respectively.

Rating

• Upgrade to BUY, TP: RM2.53
• We have turned positive on HSL following its orderbook surge. Its job flow prospects are also bright fuelled by the impending Sarawak state elections. Upgrade to BUY.

Valuation

• Apart from our earnings upgrade, we also raise our P/E target from 14x to 15x to reflect the positive sentiment on job flows driven by the upcoming Sarawak state elections. Our TP is raised from RM2.04 to RM2.53.

Source: Hong Leong Investment Bank Research - 18 Mar 2016