As one of the leading contractor in Sarawak, HSL is eyeing contracts from the state coastal highway and second trunk road projects as well as contracts associated with the state water grid. HSL is also expected to benefit from Sarawak state’s effort to improve wastewater management for the major urban centres in the state. Maintain forecast. Maintain BUY with higher TP of RM1.66 (from RM1.53), based on higher PE multiple of 13x (5 years average: 15.1x) tagged to FY19 earnings. 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 RM481m (FY18:RM142m).

We Met Up With the Management of HSL Recently With the Following Key Takeaways:

Beneficiary of Sarawak’s robust expenditure. As one of the leading contractor in Sarawak, HSL is eyeing contracts from the state coastal highway and second trunk road projects as well as contracts associated with the state water grid, as these projects draw on the group’s strength in marine engineering and geotechnical. HSL’s ownership of large fleet of advanced equipment & machinery ranging from specialised suction dredgers to tunnel boring machine allows them to handle large, complexed and technically demanding contracts.

Wastewater opportunities. HSL is also expected to benefit from Sarawak’s effort to improve wastewater management for the major urban centres in the state. Masterplans on wastewater management system for Kuching, Sibu, Miri and Bintulu have been developed while masterplans for smaller towns of Kota Samarahan, Sarikei and Mukah are currently being finalised. This presents various job opportunities for HSL given their experience in handling wastewater projects in Sarawak, namely Kuching centralised wastewater system Package 1 and 2 (RM1.3bn) and Miri wastewater project phase 1 (RM333m) which is ongoing.

Healthy 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 RM481m new job wins YTD, making up more than 95% of our FY19 orderbook replenishment target of RM500m. 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. Maintain Forecast

Maintain BUY, TP: RM1.66. Maintain BUY with higher TP of RM1.66 (from RM1.53), based on higher PE multiple of 13x (5 years average: 15.1x) tagged to FY19 earnings. 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 RM481m (FY18:RM142m).

Source: Hong Leong Investment Bank Research - 23 Jul 2019