HSL’s FY20 earnings of RM33m (-41% YoY) were within ours and consensus expectations. Operations continue to gradually normalise for both segments. Outstanding order book of RM1.9bn translates into a healthy 4.0x cover. Given the healthy DE allocation in 2021, we anticipate return of job flows in 2021 once pandemic dissipates. Tweak FY21-22 forecasts by -8%. Maintain BUY with lower TP of RM1.16 pegged to an unchanged 12x P/E multiple.

Broadly within. HSL reported 4QFY20 results with revenue of RM181.7m (+13% QoQ, -3% YoY) and core earnings of RM10.4m (-4% QoQ, 3% YoY). This brings FY20 earnings to RM32.8m, decreasing by -41% YoY. The core earnings were within our/consensus expectations accounting for 95%/105% of full year forecast.

Dividends. No dividends were declared in FY20 (FY19: 2.4 sen).

QoQ. PBT showed a 15% increase in tandem with higher revenue (+13%) driven by stronger productivity levels. However core earnings declined by -4% mainly dragged by higher tax expense during the quarter (Tax rate - 4QFY20: 30%, 3QFY20: 26%).

YoY. Core earnings improved by 3% offsetting -3% revenue decline. While its construction revenue declined (-4%), earnings improved slightly on the back of better margins as property segment saw margin enhancement (PBT margin: +9.1ppts).

YTD. FY20 core earnings declined by -41% dragged by various forms of MCO which brought upon periods of inactivity as well as suboptimal construction productivity. Ultimately, the above factors brought revenue lower by -21% during the period.

Orderbook. HSL’s latest estimated outstanding orderbook stands at c.RM1.9bn, translating into healthy level of 4.0x cover on FY20 construction revenue. Estimated contract wins for FY20 amounts to RM101m with most secured in 3QFY20 after a dry 1HFY20 as Covid-19 impacted conversion of tenders. According to management, the state’s rural infrastructure drive has resulted in smaller individual project values with carries thinner margins given the mobilisation required. Some of the jobs HSL secured this year include Kuching City inner ring road (RM66m), school in Padawan (RM13m) and water supply project (RM17m).

Outlook. We anticipate job flows in Sarawak to recover this year with tender flows likely to recover when Covid-19 cases dissipate. Recall that the state underspent its DE allocation last year only disbursing 58% by Oct-2020 as the pandemic spread. We surmise that 2021 so far has not been different given the surge in cases. Nonetheless, with a healthy unspent DE allocation we anticipate a pickup in job opportunities when cases do eventually come down. 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. Nevertheless on the operational front, HSL expects challenges relating to labour shortages to persist which would translate into thinner margins.

Forecast. We cut FY21-22 earnings by -8.7% and -7.5% as we recalibrate our margin assumptions.

Maintain BUY, TP: RM1.16. Maintain BUY with lower TP of RM1.16, pegged to an unchanged 12x PE multiple on FY21 EPS. The stock trades at an attractive FY21 ex cash P/E multiple of 6.4x with a net cash per share of RM0.35. Going forward, we expect recovering jobs flow given Sarawak’s infrastructure friendly budget.

Source: Hong Leong Investment Bank Research - 8 Mar 2021