Results

• HSL reported 4QFY16 results with revenue coming in at RM113.2m (-17% QoQ, -29% YoY) and earnings of RM11.7m (-28% QoQ, -46% YoY).
• Full year FY16 earnings amounted to RM56.4m, decreasing -26% YoY.

Deviation

• Against our forecast, full year earnings made up only 87% (consensus: 88%) which is below expectations.
• The deviation was largely due to a weaker than expected 4Q which traditionally, tends to be the strongest quarter.

Dividends

• Final DPS of 1.4 sen was declared. This brings the full year sum to 2.4 sen, unchanged YoY.

2. Highlights

• Much to do with timing gap. The less than inspiring results were largely due to a -24% decline in FY16 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 in FY16 which were Phase 2 of the Kuching Wastewater System (KWS) (RM563m) and a package of the Pan Borneo Highway (PBH) (RM1.2bn). As these are jobs with long durations (i.e. 4-6 years), there has been minimal contribution thus far as work has yet to gain significant traction. Physical work on the PBH has just begun while the KWS is still in the preliminary analysis and investigative stage.
• Sitting on sizable orderbook. Whilst new job wins were slow in the FY14-15, HSL staged a strong comeback with RM1.9bn secured in FY16. With this, its orderbook currently stands at a high of RM2.1bn, increasing drastically from a mere RM600m as of end FY15. Its orderbook level implies a superior cover ratio of 4.8x on FY16 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

• Despite the weaker than expected results, we leave our earnings estimate unchanged as we reckon that the timing gap issue will narrow in FY17-18 to propel earnings growth once again.

Rating

Maintain BUY, TP: RM2.00

• With its orderbook soaring 4-folds YTD, HSL offers investors an eventual revived growth trajectory with a projected 2 year earnings CAGR of 33%.

Valuation

• Unchanged TP RM2.00 is based on 14x P/E tagged to FY17 earnings.
• HSL continues to command a healthy balance sheet with net cash position of RM88.5m (RM0.16/ share).

Source: Hong Leong Investment Bank Research - 28 Feb 2017