HSL’s 1QFY18 earnings of RM14m (-6% QoQ, +23% YoY) were within our expectations and consensus. With delays resolved, 3 of its main chunky projects are seeing good progress. HSL’s orderbook of RM2.5bn (5.8x cover ratio) is at a healthy level. However, we turn cautious on the macro job flow outlook following the administration change post GE14 which will see mega projects being reviewed. FY18-19 earnings cut by 4% and 2% as we lower new job wins. Downgrade from Buy to HOLD with TP of RM1.38 (10x mid-FY19 P/E).

Within expectations. HSL reported 1QFY18 results with revenue of RM131.8m (- 22% QoQ, +39% YoY) and earnings of RM13.8m (-6% QoQ, +23% YoY). The latter accounted for 20% of our full year forecast (consensus: 19%) which we deem to be within expectations as 2H is traditionally stronger.

Project delays resolved. Last year, 2 of HSL’s mega projects suffered from delays, namely the Pan Borneo Highway (PBH) and Kuching Wastewater System (KWS). On the PBH (RM1.65bn), delays due to utilities relocation have been resolved and progress is now at 25%. For the KWS (RM750m), the start work order was only issued towards end-3Q17 and progress is now at 5%. With delays for these 2 mega projects finally resolved, coupled with good progress for the Miri wastewater job (15% completion), we expect earnings momentum to accelerate going forward.

Cautious on job flow outlook. Following the change in government post GE14, we have turned cautious on the overall macro job flow outlook for the construction sector. The new administration has stated that it will put all mega projects under review to ensure that the terms are fair to the government and country. We feel that this will result to project award delays (as they are reviewed) or in the worst case, an outright cancellation.

Orderbook level still healthy. Despite our cautious tone on the macro job flow outlook, we do note that HSL’s orderbook of RM2.5bn remains at a healthy level. This translates to a strong cover of 5.8x on FY17 construction revenue. We do note that HSL has yet to announce any new contract wins YTD, which pretty much mirrors the rather slow momentum of job flows across the board.

Forecast. Although the results were inline, our overall cautious tone on the construction sector prompts us to reduce FY18-19 annual new job wins target from RM500m to RM300m, lowering FY18-19 earnings by 4% and 2% respectively.

Downgrade to HOLD, TP: RM1.38. We reduce our P/E target from 14x to 10x (still pegged to mid-FY19 earnings) to reflect the overall construction sector de-rating emitting from the macro job flow uncertainty. Our TP is cut from RM1.98 to RM1.38 and we downgrade from Buy to HOLD.

Source: Hong Leong Investment Bank Research - 25 May 2018