HSL’s FY19 earnings of RM55m (+3% YoY) were below ours and consensus expectations due to slower-than-expected construction progress billings. YTD core PATAMI (+3% YoY) increased due to stronger contribution from the construction segment. Outstanding order book of RM2.2bn translates into 3.7x cover ratio with FY19 job wins amounting to RM663m (FY18: RM142m). Cut FY19-21 earnings forecast by 3-12%. Downgrade to HOLD (from BUY) with lower TP of RM1.33 (from RM1.64) due to earnings cut pegged to a lower 12x FY20 PE multiple.

Below expectations. HSL reported 4QFY19 results with revenue of RM187.6m (+8% QoQ, +24% YoY) and core earnings of RM10.1m (-30% QoQ, -12% YoY). This brings FY19 core earnings to RM55.2m, increasing by 3% YoY. The core earnings accounted for 89% of our full year forecast (consensus: 91%) which is below expectations.

Deviations. The results shortfall came from slower-than-expected construction progress billings possibly from slower work progress for Pan Borneo Sarawak.

Dividends. DPS of 1.4 sen was declared for the quarter (FY19: 2.4 sen, FY18: 2.4 sen).

QoQ/ YoY. QoQ and YoY core PATAMI declined by 30% and 12% mainly due to lower property segment PBT margins (QoQ: -2.5ppts, YoY: -5ppts).

YTD. YTD core PATAMI increased slightly by 3% driven stronger construction progress billings.

Orderbook. HSL’s latest outstanding orderbook stands at c.RM2.2bn, translating into healthy level of 3.7x cover of FY19 revenue. YTD job wins amounted to RM663m, exceeding our FY19 job replenishment target of RM650m.

Sarawak centric. HSL’s jobs prospects remains bright in the medium term as we expect momentum of project flows in Sarawak to continue as the next state elections must be held before Sept 2021. Under the Sarawak Coastal Road Network project, remaining subcontracts are expected to be awarded this year. Sarawak Second Trunk Road project (RM5bn) is slated to see 11 sub-packages being tendered out soon. 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 SSLR (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-2020. However, we see emerging risks of delays for SSLR as it was proposed by the ex Minister of Works, Baru Bian.

Forecast. Cut FY20-21 earnings by 11.9% and 5.6% respectively after adjusting construction progress billing assumptions.

Downgrade to HOLD, TP: RM1.33. We downgrade our rating to HOLD (from Buy) with lower TP of RM1.33 (from RM1.64) after earnings forecast adjustment, pegged to a lower 12x PE multiple (from 13x) in-line with trading multiples of smaller contractors. While we like HSL as a major beneficiary of Sarawak’s robust infrastructure spending, as evident by its decent FY19 new job wins of RM663m (FY18: RM142m), this positive is offset by (i) continued delays at PBH; no longer PDP model and (ii) recent political uncertainty potentially delaying project rollouts.

Source: Hong Leong Investment Bank Research - 28 Feb 2020