HSL’s 1HFY19 earnings of RM31m (+9% YoY) were below our expectations (within consensus) due to lower than expected construction progress billings. YTD core PATAMI increased due to higher contribution from property segment. Outstanding order book of RM2.5bn translates into 4.8x cover ratio and YTD job wins has exceed our FY19 job replenishment target. Cut FY19-21 earnings forecast by 1-5%. Maintain BUY with lower TP of RM1.58 (from RM1.66) after earnings forecast adjustment, based on 13x PE multiple pegged to FY19 earnings.

Below expectations. HSL reported 2QFY19 results with revenue of RM175.4m (+20% QoQ, +14% YoY) and core earnings of RM16.4m (+17% QoQ, +16% YoY). This brings 1HFY19 core earnings to RM30.5m, increasing by 9% YoY. The core earnings accounted for 42% of our full year forecast (consensus: 47%) which is below our expectation but within consensus. The results shortfall was mainly due to lower than expected construction progress billings. Declared 1st interim dividend of 1.0 sen (1HFY18: 1.0 sen) going ex on 18 September 2019.

QoQ/ YoY. QoQ and YoY core PATAMI increased by 17% and 16% respectively mainly due to better performance from both construction and property segments.

YTD. Core PATAMI increased by 9% due to higher contribution from property segment.

Orderbook. HSL’s latest outstanding orderbook stands at c.RM2.5bn, translating into decent level of 4.8x cover of FY18 revenue. YTD job win amounted to RM585m, exceeding our FY19 job replenishment target of RM500m.

Sarawak the next place to be. 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. Cut FY19-21 earnings by 4.9%, 1.3% and 0.3% respectively after adjusting construction progress billing assumptions but partially offset by the increase in our FY19 job replenishment target to RM700m (from RM500m).

Maintain BUY, TP: RM1.58. Maintain BUY with lower TP of RM1.58 (from RM1.66) after earnings forecast adjustment, based on 13x PE multiple pegged to FY19 earnings. We like HSL as we deem it as a major beneficiary of Sarawak’s robust infrastructure spending, as evident by its healthy YTD new job wins of RM585m (FY18: RM142m).

Source: Hong Leong Investment Bank Research - 23 Aug 2019