Results

• HSL reported 4Q17 results with revenue of RM168m (+33% QoQ, +48% YoY) and earnings of RM14.7m (+33% QoQ, +25% YoY).

• Full year FY17 revenue amounted to RM505.9m (+1% YoY) while earnings stood at RM46.5m (-18% YoY).

Deviation

• FY17 earnings made up 98% of our full year forecast and 101% of consensus which is within expectations.

Dividends

• Final DPS of 1.4 sen declared bringing the full year sum to 2.4 sen (unchanged YoY).

Highlights

• Project delays resolved. Despite HSL’s orderbook being at a high, FY17 revenue remained flat YoY. This was due to delays of 2 mega projects in its orderbook, namely the Pan Borneo Highway (PBH) Sarawak and Kuching Wastewater System (KWS) which were both awarded in 1Q16. On the PBH, we understand that hiccups due to utilities relocation have been resolved and progress is picking up. For the KWS, the official start work order was finally issued at end 3Q17 after a long drawn period of ironing out contract matters. With delays for these 2 mega projects finally resolved, coupled with good progress for the Miri wastewater job, we expect earnings momentum to accelerate going forward. This is already evident in 4Q17 which saw both strong YoY and QoQ increase in revenue and earnings.

• Job wins have been strong. HSL has managed to secure RM575m worth of new jobs in FY17. This includes the sizable contract for the centralised sewerage system in Miri (RM333m). Other job wins include roads in Samalaju, training institution in Mukah and XFab building. Overall, HSL’s orderbook remains at a high of RM2.7bn, translating to a robust cover of 4.9x on FY17 construction revenue.

Risks

• Delays in 3 of its mega projects.

Forecasts

• Unchanged as the results were in line.

Rating

Upgrade to BUY, TP: RM1.98

• Despite its record orderbook, we were previously cautious on HSL due to delays in the PBH and KWS jobs. With delays on these 2 jobs resolved and earnings starting to kick in, we have turned upbeat on HSL which also boasts a strong balance sheet with net cash position. Upgrade rating from Hold to BUY.

Valuation

• Despite the unchanged earnings, we roll over our valuation horizon from FY18 to mid-FY19 at an unchanged P/E target of 14x to derive our new TP of RM1.98 (from RM1.48 previously).

Source: Hong Leong Investment Bank Research - 28 Feb 2018