In anticipation of higher project flows in Sarawak prior to the next state elections (must be held before Sep 2021), HSL is deemed as a major beneficiary of Sarawak’s robust infrastructure spending, as evident by its decent YTD new job wins of RM481m (FY18:RM142m). HSL is eyeing further contracts in the state as funding could be available from Sarawak’s solid state reserves (c.RM31bn). Valuations are not pricey at 10x FY20 P/E and 0.93 P/B, supported by its outstanding order book of ~RM2.5b (3 years visibility). Technically, the stock is ripe for a rebound towards RM1.39-1.55 zones, pending a decisive breakout above downtrend line at RM1.35.

HLIB reiterates a BUY on HSL with RM1.66 TP (+24.8% upside), based on PE multiple of 13x (5 years average: 15.1x) tagged to FY19 earnings. HSL is eyeing more contracts in Sarawak (state coastal highway, second trunk road and water grid and wastewater management projects). 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.

Ripe for a relief rebound from steeply oversold levels. Although near term outlook remain challenging after multiple key SMAs supports breakdown, HSL technical readings are steeply oversold after correcting 17% from 52W high of RM1.61 (25 Feb) to RM1.33 yesterday. The stock could trend sideways in the near term to build a base with key supports near RM1.30 psychological support and 52W low at RM1.29 (11 Oct 2018) before staging a long overdue technical rebound. A decisive breakout above RM1.35 (downtrend line) will spur prices higher towards RM1.39 (200D SMA) and RM1.45 (50% FR) before reaching our LT objective at RM1.55 (14 March high). Cut loss at RM1.26.

Source: Hong Leong Investment Bank Research - 16 Aug 2019