HSL’s 9MFY19 earnings of RM45m (+7% YoY) were below ours and consensus expectations due to slower than expected construction progress billings. YTD core PATAMI (+7% YoY) increased due to stronger contribution from both construction and property segments. Outstanding order book of RM2.5bn translates into 4.8x cover ratio with YTD job wins amounting to RM605m (FY18: RM142m). Cut FY19-21 earnings forecast by 7-10%. Maintain BUY with higher TP of RM1.64 (from RM1.58) despite the earnings cut as we rollover our valuation base to FY20, pegged to an unchanged 13x PE multiple.

Below expectations. HSL reported 3QFY19 results with revenue of RM173.8m (-1% QoQ, flat YoY) and core earnings of RM14.6m (-11% QoQ, +2% YoY). This brings 9MFY19 core earnings to RM45.1m, increasing by 7% YoY. The core earnings accounted for 68% of our full year forecast (consensus: 71%) which is below both our and consensus expectations. No dividends were declared for the quarter.

Deviations. The results shortfall came mainly from slower than expected construction progress billings.

QoQ. QoQ core PATAMI declined by 11% mainly due to lower construction PBT margin (-3.3ppts).

YoY/ YTD. YoY and YTD core PATAMI increased by 2% and 7% respectively mainly due to stronger contribution from both construction and property segments.

Orderbook. HSL’s latest outstanding orderbook stands at c.RM2.5bn, translating into decent level of 4.8x cover of FY18 revenue. YTD job wins amounted to RM605m, within our FY19 job replenishment target of RM650m.

Sarawak centric. HSL’s jobs prospects remains bright in the near term as we expect momentum of project flows in Sarawak to accelerate as the next state elections must be held before Sept 2021. Management opines that the recently announced Sarawak 2020 budget (RM9.9bn) which continues to give substantial allocation on infrastructure development will benefit the company moving forward. Under the Sarawak Coastal Road Network project (RM6bn), remaining four bridge contracts with combined value of RM1.8bn are expected to be awarded soon. Sarawak Second Trunk Road project (RM5bn) is slated to see 11 sub-packages being tendered out by 1Q2020. Sarawak’s state reserves of c.RM31bn will provide funding for both projects insulating them from a pullback in federal government spending. Another mega infrastructure project in the pipeline is the federally funded Sabah-Sarawak Link Road (RM5.2bn). The first work package (RM1.2bn) stretching 90km within Sarawak is to be tendered out by 1H20 with works to start by Oct next year. We reckon the slew of mega projects rollout in Sarawak provides HSL with strong tenderbook visibility moving forward.

Forecast. Cut FY19-21 earnings by 7.0%, 9.8% and 7.3% respectively after adjusting construction progress billing assumptions and decrease our FY19 job replenishment target to RM650m (from RM700m).

Maintain BUY, TP: RM1.64. Despite the results shortfall and earnings cut, we maintain our BUY rating with slightly higher TP of RM1.64 (from RM1.58) as we rollover our valuation base to FY20, pegged to an unchanged 13x PE multiple. We like HSL as a major beneficiary of Sarawak’s robust infrastructure spending, as evident by its decent YTD new job wins of RM605m (FY18: RM142m).

Source: Hong Leong Investment Bank Research - 19 Nov 2019