Results

• 3QFY15 results came in with revenue of RM136m (+27% QoQ, -14% YoY) and earnings of RM16.3m (+35% QoQ, - 8% YoY).

• Cumulative 9M earnings totalled RM44.7m, declining -18% YoY.

Deviation

• 9M earnings only made up 62% of our full year forecast (55% of consensus) which is below expectations.

Dividends

• None declared for the quarter.

Highlights

• Timing gap still lingers. The less than inspiring results were largely due to a -22% decline in 9M revenue. This resulted from a timing gap between the completion of older jobs and commencement newer ones. To recap, HSL managed to secure 2 sizable contracts YTD which were Phase 2 of the Kuching Wastewater System (KWS) (RM563m) and a package of the Pan Borneo Highway (PBH) (RM1.2bn). As these long duration jobs were only secured in March, there has been minimal contribution thus far as work has yet to gain traction. Physical work on the PBH has just begun while the KWS is still in the preliminary analysis and investigative stage.

• Backed sizable orderbook. Whilst new job wins were slow in the past 2 years, HSL staged a strong comeback with RM1.9bn secured YTD. With this, its orderbook currently stands at a high of RM2.2bn, quadrupling from a mere RM600m as of end FY15. Its orderbook level implies a superior cover ratio of 3.5x 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

• Given the slower than expected commencement of its 2 major projects, we scale back FY16-18 earnings by 10%, 9% and 9% respectively on slower progress billings.

Rating

Maintain BUY, TP: RM2.00

• With its orderbook soaring 4-folds YTD, HSL offers investors an eventual revived growth trajectory with a projected 3 year earnings CAGR of 10%.

Valuation

• In line with our earnings cut, our TP is reduced from RM2.19 to RM2.00 which is still based on 14x FY17 earnings.

• HSL continues to command a healthy balance sheet with net cash position of RM111m (RM0.20/ share)

Source: Hong Leong Investment Bank Research - 25 Nov 2016