HSL’s 1HFY18 earnings of RM28m (+35% YoY) were within our expectations and consensus. Core PATAMI increased due to higher contribution from construction segment. 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. Maintain forecast and HOLD call with unchanged TP of RM1.38 (10x mid-FY19 P/E).

Within expectations. HSL reported 2QFY18 results with revenue of RM154.2m (+17% QoQ, +45% YoY) and core earnings of RM14.1m (+3% QoQ, +48% YoY). This brings 1HFY18 core earnings to RM27.9m, increasing by 35% YoY. The core earnings accounted for 42% of our full year forecast (consensus: 43%) which we deem to be within expectations as 2H is traditionally stronger. 1 sen interim dividend was declared.

YoY. Core PATAMI of RM14.1m increased by 48% YoY mainly due to higher contribution from construction segment.

QoQ. Core PATAMI increased by 2.5% due to higher construction activities, partially offset by lower margin.

YTD. Core PATAMI of RM27.9m increased by 35% YoY mainly due to higher contribution from construction segment.

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 30%. 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 (18% 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 understand the company is currently bidding for work package from Sarawak Coastal Road Project which is expected to cost RM5bn. Another upcoming project in the pipeline of Sarawak state is the Second Trunk Road Project which is expected to cost RM6bn.

Forecast. Maintained as the results were deemed inline,

Maintain HOLD, TP: RM1.38. Maintain HOLD rating and TP of RM1.38 (10x mid FY19 P/E). Despite its record order book, we remain cautious on the slowing macro job flow outlook.

Source: Hong Leong Investment Bank Research - 17 Aug 2018