News

• Bags Pan Borneo package. The HSL-DMIA JV announced that it has been awarded a package of the Pan Borneo Highway (PBH) from Lebuhraya Borneo Utara worth RM1.7bn. Based on HSL’s 70% stake in the JV, its share of the contract works out to be RM1.2bn.

• Scope of works. The highway package will run from Bintangor Junction to Julau Junction and Sibu Airport to Sg Kua Bridge (including Batang Rajang Bridge) over a period of 51 months (slightly above 4 years).

Comments

• 2nd significant win in 2 days. While we were confident on HSL winning a package of the PBH, we certainly didn’t expect it to happen so soon. To recap, just a day before, HSL also won Package 2 of the Kuching Wastewater System job worth RM750m (RM563m based on 75% stake).

• Orderbook quadruples. Including the PBH package, HSL’s job wins now amount to RM1.8bn YTD. We estimate its orderbook to currently stand at RM2.4bn, quadrupling from a mere RM600m at the end of FY15. HSL’s orderbook implies a strong cover ratio of 3.9x on FY15 construction revenue, offering a high degree of earnings visibility.

• Ride the election play. Momentum of contract flows in Sarawak has been gaining traction of late which we believe is attributed to the impending state elections. This could pick up in the near term as the polls draw closer which is currently rumoured to be held on 30th April.

Risks

• Risk of its weak orderbook replenishment has now abated with robust job flows this month.

Forecasts

• While YTD job wins of RM1.8bn have surpassed our RM1.5bn assumption for FY16, we keep our earnings projection unchanged for now as we take a more prudent stance. Note that we have already upgraded our earnings forecast by 8-18% in our report yesterday.

Rating

• Maintain BUY, TP: RM2.53
• In less than a quarter, HSL has witnessed a significant 4-fold increase in its orderbook. Share price has however, only appreciated by 4% in the past 2 days despite the announcement of 2 record size contract wins. We feel that the market has yet to fully digest the significance of these wins, perhaps due to its sheer size in such a short time span. We advise investors to take advantage of the relatively muted share price reaction to jump on the bandwagon.

Valuation

• Our TP of RM2.53 is based on 15x mid-CY16 earnings. The premium valuation parameter is to reflect the upswing in job flows stemming from the impending Sarawak state elections.

Source: Hong Leong Investment Bank Research - 21 Mar 2016