Results

• HSL reported 2QFY17 results with revenue of RM106.4m (+1% QoQ, -1% YoY) and earnings of RM9.5m (-15% QoQ, -21% YoY). This brings cumulative 1H earnings to RM20.8m, declining by 27% YoY.

Deviation

• 1H earnings made up 34% of our full year forecast (consensus: 32%) which is below expectations.

Dividends

• An interim DPS of 1 sen was declared (unchanged YoY).

Highlights

• Delays in wastewater project. Despite HSL’s orderbook being at a high, revenue for 1H fell 15% YoY. This was due to delays in the commencement of the Kuching Wastewater System (KWS) (RM750m). Although the job was awarded back in 1Q16, works have been slow to kick start due to ground conditions in which HSL is currently ironing out with its client (i.e. Sarawak state government).

• Dent on margins. Overall PBT margins for 1H contracted to 13.2% from 15.1%. This was attributed to cost pressures from labour and subcontractors.

• Strong on job wins. HSL has managed to secure RM558m worth of new jobs in 1H. This includes the sizable contract for the centralised sewerage system in Miri (RM333m). Other job wins include a water treatment plant in Mukah, Samalaju Port administrative building and infra works for Samalaju Industrial Park. Overall, HSL’s orderbook remains at a high of RM2.6bn, translating to a robust cover of 6x on FY16 construction revenue.

Risks

• Continued delays in the commencement of the KWS.

Forecasts

• Given the weaker than expected results, we cut our FY17-19 earnings forecast by 22%, 16% and 11% respectively. This largely stems from delays in the recognition of the KWS job.

Rating

Downgrade to HOLD, TP: RM1.48

• Although HSL is backed by a record high orderbook, delays in the KWS will continue to hamper earnings delivery in the term. As such, we downgrade our rating from Buy to HOLD

Valuation

• The cut in our earnings forecast leads to our TP being reduced from RM1.83 to RM1.48 which is based on an unchanged 14x P/E multiple tagged to mid-FY18 earnings.

• Balance sheet remains healthy in a net cash position (RM0.13/share).

Source: Hong Leong Investment Bank Research - 23 Aug 2017