HSL’s FY18 earnings of RM54m (+16% YoY) were below our expectations and consensus due to higher than expected depreciation expenses. YTD core PATAMI increased due to higher contribution from both construction and property segment. HSL’s orderbook of RM2.2bn (4.2x cover ratio) is at a healthy level. Cut FY19-20 earnings by 2.2% and 0.3% respectively after impute higher depreciation expenses. Maintain HOLD rating with lower TP of RM1.38 (from RM1.41) after earnings forecast adjustment. TP is derived by pegging 10x PE multiple to FY19 earnings.

Below expectations. HSL reported 4QFY18 results with revenue of RM151.1m (- 13% QoQ, -10% YoY) and core earnings of RM11.5m (-19% QoQ, -21% YoY). This brings FY18 core earnings to RM53.8m, increasing by 16% YoY. The core earnings accounted for 89% of our full year forecast (consensus: 92%) which is below expectations. The deviation of results is mainly due to higher than expected depreciation expenses incurred.

QoQ/ YoY. Core PATAMI decreased by 19% and 21% respectively due to lower construction activities and lower margin.

YTD. Core PATAMI of RM53.8m increased by 16% YoY mainly due to higher contribution from both construction and property segment.

Orderbook level still healthy. HSL’s orderbook of RM2.2bn remains at a healthy level. This translates to a strong cover of 4.2x on FY18 construction revenue. We maintain our FY19 orderbook replenishment rate and it has secured RM54m worth of contracts YTD. We deem the replenishment rate as conservative as we expect jobs start rolling out from Sarawak this year as projects such as Sarawak Coastal Road and Trunk Road as well as water works are mostly in tendering stage after pre qualification.

Projects progress. We understand that 2 HSL’s mega projects namely Pan Borneo Highway (35% completion) and Miri wastewater job (40% completion) are in advanced stages with high construction progress billing and hence we expect earnings momentum to continue accelerate going forward.

Sarawak the next place to be. Job flows in Peninsular Malaysia slowed down significantly following the change in Federal government. We understand that industry players are aiming for jobs in Sarawak as state government has allocated c.RM9bn for development expenditure under state budget 2019 which is the biggest in the history of the state. Funding for those projects is expected to come from Sarawak’s state reserves (c.RM30bn) which may insulate the projects from risk of reduction of federal government spending.

Forecast. Cut FY19-20 earnings by 2.2% and 0.3% respectively after impute higher depreciation expenses.

Maintain HOLD, TP: RM1.38. Maintain HOLD rating with lower TP of RM1.38 (from RM1.41) after earnings forecast adjustment. TP is derived by pegging 10x PE multiple to FY19 earnings. Despite its record order book, we remain cautious on the slowing macro job flow outlook.

Source: Hong Leong Investment Bank Research - 27 Feb 2019