HSL reported 1QFY19 earnings of RM14m (+22% QoQ, +2% YoY) which were below our expectations and consensus. This was mainly due to lower than expected construction progress billings. HSL’s current orderbook stands at RM2.5bn which translates to a decent cover of 4.8x on FY18 construction revenue. HSL’s jobs prospect remain bright in the near term as we expect momentum of project flows in Sarawak to gain traction as the next state elections must be held before Sept 2021. Remaining packages under Sarawak Coastal Road Network is expected to roll out this year. Cut FY19-20 earnings by 13-19%. Maintain BUY with lower TP of RM1.53 (from RM1.76). We like HSL as we deem it as a major beneficiary of Sarawak’s robust infrastructure spending, as evident by its decent YTD new job wins of RM354m (FY18:RM142m).

Below expectations. HSL reported 1QFY19 results with revenue of RM146.7m (-3% QoQ, +11% YoY) and core earnings of RM14.1m (+22% QoQ, +2% YoY). The latter made up 18% of our full year forecast (consensus: 21%) which is below expectations. The deviation was mainly due to lower than expected construction progress billings.

QoQ. Core PATAMI increased by 22% mainly due to higher contribution from construction segment, partially offset by lower profit from property division.

YoY. Core PATAMI was flattish (+2%) mainly due to higher profit from property segment, but was offset by lower construction profit.

Decent orderbook level. HSL’s current orderbook stands at RM2.5bn which translates to a decent cover of 4.8x on FY18 construction revenue. The company secured RM354m new job wins YTD, making up more than 70% of our FY19 orderbook replenishment target of RM500m.

Bright jobs prospect. HSL’s jobs prospect remain bright in the near term as we expect momentum of project flows in Sarawak to gain traction as the next state elections must be held before Sept 2021. Remaining six bridge contracts with combined value of RM2.4bn under Sarawak Coastal Road Network (SCRN) project are expected to be awarded in this year. Other sub-packages under the upgrading and rehabilitation of SCRN project are also expected to roll out soon. Another Sarawak mega infrastructure project, namely the Second Trunk Road project is now in the design stage and is expected to open tender in 4Q19 or 1Q20. These 2 mega infrastructure projects are expected to cost RM11bn in total. Funding is available for implementation of these projects and is expected to come from Sarawak’s state reserves (c.RM31bn) which may insulate the projects from risk of reduction of federal government spending.

Forecast. In view of the lower than expected results, we cut FY19-20 earnings by 12.7% and 19.4% respectively after factoring in adjustment of progress billings. We introduce our FY21 earnings forecast of RM85.0m.

Maintain BUY, TP: RM1.53. Following the earnings cut, our TP is lowered from RM1.76 to RM1.53 which is still tagged to 12x FY19 earnings, maintain BUY. We like HSL as we deem it as a major beneficiary of Sarawak’s robust infrastructure spending, as evident by its decent YTD new job wins of RM354m (FY18:RM142m).

Source: Hong Leong Investment Bank Research - 24 May 2019