HSL’s 9MFY20 earnings of RM22.4m (-50% YoY) were within ours and consensus expectations. Outstanding order book of RM2.1bn translates into a healthy 3.5x cover. Given the underspent state DE for 2020 as well as healthy DE allocation in 2021, we anticipate return of job flows in 2021. Maintain earnings forecasts. Upgrade to BUY with same TP of RM1.06 pegged to an unchanged 10x P/E multiple.

Within expectations. HSL reported 3QFY20 results with revenue of RM161.2m (+94% QoQ, -7% YoY) and core earnings of RM10.9m (+175% QoQ, -25% YoY). This brings 9MFY20 earnings to RM22.4m, decreasing by -50% YoY. The core earnings were within our and consensus expectations accounting for 65% of our full year forecast (consensus: 69%).

Dividends. No dividends were declared in 9MFY20 (9MFY19: 1.0 sen).

QoQ. HSL’s core earnings rebounded by 175% due to low base in 2QFY20. Leading the rebound was the construction segment which saw PBT surging by 3-fold while property PBT recovered by 74%.

YoY/YTD. Core earnings declined by -25% and -50% on a YoY and YTD basis. This was largely in tandem with revenue decline of -7% (YoY) and -28% (YTD). Operations for 9MFY20 were largely hindered by inactivity caused by MCO while weakness in 3QFY20 results was from lingering inability to recover pre-pandemic productivity levels. Management highlighted a slight loss in recovery momentum due to imposition of CMCO.

Healthy orderbook. HSL’s latest outstanding orderbook stands largely unchanged at c.RM2.1bn, translating into healthy level of 3.5x cover of FY19 construction revenue. Management divulged that contract wins YTD amounts to RM101m after a dry 1HFY20 as Covid-19 impacted conversion of tenders. While job wins are miniscule relative to RM663m achieved in FY19, we are comforted by the return of job flows so far in 2HFY20 as the company secured new jobs namely, Kuching City inner ring road (RM66m), school in Padawan (RM13m) and water supply project (RM17m).

Outlook. HSL’s job prospects looks to be improving with healthy state and federal budget allocation recently. Recall that Sarawak was allocated RM4.5bn of development expenditure (DE) funds in the federal budget. In addition, Sarawak has allocated RM6.3bn for development expenditure in 2021, a level similar to 2020. We understand that Sarawak’s 2020 DE disbursement was slow amounting to only RM3.8bn by Oct-2020, (58% of its initial 2020 allocation) due to Covid-19 mitigation measures. As such, we believe contract flows will accelerate into next year given the underspent DE so far, not to mention state polls which must be held by Aug 2021. Among the various projects mentioned in the state budget include Coastal road, Trunk road, Lawas-Limbang road, water supply grid, agropark as well as numerous roads and bridges.

Forecast. Unchanged as earnings are inline.

Upgrade to BUY, TP: RM1.06. We upgrade the stock to BUY (from Hold) with unchanged TP of RM1.06, pegged to an unchanged 10x PE multiple. Our TP is derived based on FY21 EPS as it better reflects the sustainable earnings for the company. The stock trades at an attractive FY21 ex-cash P/E multiple of 6.3x. Going forward, we expect robust jobs flow given Sarawak’s infrastructure friendly budget.

Source: Hong Leong Investment Bank Research - 27 Nov 2020