HSL announced that it has been awarded a RM299m contract by the Sarawak state government for construction of the Batang Paloh Bridge in Mukah. The work is expected to commence in May 2019 and completed within a period of 48 months. Increase FY19-20 earnings by 6% and 11% respectively after increase our FY19 orderbook replenishment target to RM500m (from RM300m). Upgrade to BUY with higher TP of RM1.76 (from RM1.41) after earnings forecast adjustment and higher PE multiple of 12x (from 10x) as we deem HSL as a major beneficiary of Sarawak’s robust infrastructure expenditure.

NEWSBREAK

Batang Paloh bridge contract. HSL announced that it has been awarded a RM299m contract by the Sarawak state government for construction of the Batang Paloh Bridge in Mukah. This contract falls under Package 3 that is part of the RM11bn allocated for the upgrading works for the coastal road, second trunk road and water supply works in Sarawak. The work is expected to commence in May 2019 and completed within a period of 48 months.

HLIB’s VIEW

Second construction job win. This is the second construction job win for HSL and this brings its YTD job wins to RM354m, exceeding our FY19 orderbook replenishment assumption of RM300m. Its outstanding orderbook currently stands at c.RM2.5bn which translates to a decent cover of 4.8x on FY18 construction revenue.

Sarawak the next place to be. Job flows in Peninsular Malaysia have slowed down significantly post GE14. 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.RM31bn) which may insulate the projects from risk of reduction of federal government spending. Just this week, Opus was appointed as the project management consultant for the coastal road and second trunk road projects, indicating that these jobs are on the verge of rolling out. The momentum of project flows in Sarawak should also gain traction as the next state elections must be held before Sept 2021.

Forecast. Increase FY19-20 earnings by 6% and 11% respectively after increasing our FY19 orderbook replenishment target to RM500m (from RM300m).

Upgrade to BUY, TP: RM1.76. Upgrade to BUY with higher TP of RM1.76 (from RM1.41) after earnings forecast adjustment and higher PE multiple of 12x (from 10x) as we deem HSL as a major beneficiary of Sarawak’s robust infrastructure expenditure, as evident by this recent job win.

Source: Hong Leong Investment Bank Research - 18 Apr 2019