Results

• HSL reported 3QFY17 results with revenue of RM126.3m (+19% QoQ, -7% YoY) and earnings of RM11.1m (+16% QoQ, -32% YoY).

• Cumulative 9M revenue amounted to RM337.9m (-12% YoY) while earnings stood at RM31.9m (-29% YoY).

Deviation

• 9M earnings made up 67% of our full year forecast which is within expectations as we foresee a pickup in 4Q as explained below. The results were however below consensus at 61%.

Dividends

• None declared.

Highlights

• Wastewater project delays resolved. Despite HSL’s orderbook being at a high, revenue for 9M fell 12% 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 as HSL was ironing out some final contract specifications with the client (i.e. Sarawak state government). However, we are pleased to note that ground works on the job have finally commenced in Sept. As such, 4Q should start to see some contribution from the job.

• Dent on margins. Overall PBT margins for 9M contracted from 15.4% to 12.7%. This was attributed to (i) cost pressures from labour and subcontractors and (ii) conservative margin recognition for the Pan Borneo Highway which is still at the early stage of the S-Curve construction cycle.

• Job wins have been strong. HSL has managed to secure RM643m worth of new jobs in YTD. 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, infra works for Samalaju Industrial Park and X-Fab building. Overall, HSL’s orderbook remains at a high of RM2.7bn, translating to a robust cover of 6x on FY16 construction revenue.

Risks

• Slow pick up in progress of newer projects which may result to a timing gap issue.

Forecasts

• Unchanged as the results were inline.

Rating

Maintain HOLD, TP: RM1.48

• Although HSL is backed by a record high orderbook, we are still cautious on the timing gap between its completed older jobs and the commencement of newer ones which may continue to hamper near term earnings.

Valuation

• Our TP of RM1.48 is based on a 14x P/E target tagged to mid-FY18 earnings.

Source: Hong Leong Investment Bank Research - 24 Nov 2017