News

• Wins sewer contract. HSL announced that it has been awarded a RM333m contract for the wastewater treatment plant and sewer networks in Miri from the Sarawak Sewerage Services Department. The project is for 48 months and involves earthworks, wastewater treatment plant, sewer networks, pumping station and property connections.

Comments

• Sizable start this year. This is HSL’s first contract win announced for FY17. With this job in the bag, we estimate its orderbook to now stand at RM2.4bn. Against FY16 construction revenue, this translates to a strong cover ratio of 5.6x.
• Continuing from last year’s strong job wins. To recap, HSL managed to secure a record RM1.9bn worth of jobs last year. This largely comprised 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.

Risks

• With its sizable orderbook, execution is a key risk to watch out for.

Forecasts

• As YTD job wins of RM333m are still within our RM400m orderbook replenishment for FY17, we retain our earnings forecast. However, there is potential upside to our earnings estimate as 83% of our orderbook target has already been met despite only being in early March.

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 - 06 Mar 2017