Results

• 1QFY16 results came in with revenue of RM142m (-24% YoY, -11% QoQ) and earnings of RM16m (-17% YoY, -25% QoQ).

Deviation

• First quarter earnings made up 19% of our forecast and 17% of consensus which is below expectations.

Dividends

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

2Highlights

• Timing differences hampers topline but.. . The soft results largely stemmed from revenue contraction both YoY and QoQ. This was largely due to timing differences between the completion of older jobs and the commencement of newer ones. Recently, HSL secured 2 major contracts which were Phase 2 of the Kuching City Central Wastewater Management System (75% stake of RM750m) and the Pan Borneo Highway from Batingor to Julau and Sibu Airport to Sg Kua (70% stake of RM1.7bn). As these 2 major contracts were only secured in March, they did not contribute to 1Q earnings.

• …orderbook is now at its peak. Whilst new job wins were slow in FY14-15, HSL managed to stage a strong comeback with RM1.9bn secured YTD. With this, its orderbook now stands at a high of RM2.4bn, quadrupling from a mere RM600m as of end FY15. Its orderbook level implies a superior cover ratio of 3.9x on FY15 construction revenue, providing a strong degree of earnings visibility.

Risks

• Given its all-time high orderbook, execution risk is a key area to watch out for.

Forecasts

• We cut FY16-17 earnings by 8% and 5% respectively as we scale back the revenue recognition assumptions for its 2 major contracts.
• After adjustments, we forecast FY16 earnings to grow by a mere 5% to RM80m. However, its growth profile is projected to accelerate to 18% and 16% in FY17-18 once progress on the 2 major contracts shifts into full swing.

Rating

• Maintain BUY, TP: RM2.22
• With its orderbook soaring 4-folds YTD, HSL offers investors a revived growth trajectory with a projected 3 year earnings CAGR of 13%.

Valuation

• Apart from our earnings cut, we also reduce our P/E target from 15x to 14x (still tagged to mid-CY17 earnings) after removing the “Sarawak Election premium”. Overall, this reduces our TP from RM2.53 to RM2.22.
• HSL continues to command a healthy balance sheet with net cash position of RM132m (RM0.24/ share).

Source: Hong Leong Investment Bank Research - 20 May 2016