HSL announced its first contract win for 2021 carrying a contract sum of RM131m. Job scope includes construction and completion of Leadership Training Institute in Sarawak. HSL’s outstanding orderbook now stands at RM1.9bn representing a sizable 4.0x cover. Overall, we find the job win within expectations forming 26% of our forecasts for 2021. We anticipate gradual recovery in contract flows due to state’s infrastructure budget backlog. Maintain forecasts. Maintain BUY with unchanged TP of RM1.16 pegged to unchanged 12x P/E multiple.

NEWSBREAK

First win in 2021. HSL announced its first job win in 2021 having received a LoA from Yayasan Sarawak, a statutory body of the Sarawak State Government. The award is for the construction and completion of Leadership Training Institute for Sarawak Civil Service (Phase 1) in Kuching for a contract sum of RM130.7m. Scope of works under the project include infrastructure works, pilling, administrative building & accommodation blocks as well as M&E works which will commence in April 2021 spanning 27 months.

HLIB’S VIEW

Decent start. The contract win brings HSL’s outstanding orderbook to RM1.9bn representing a sizable 4.0x cover based on FY20 construction revenue. With this job win, the company is on track to meet our expectations of RM500m worth of contract replenishment this year (26% of 2021 forecast). We reckon this could indicate the start of a gradual recovery in contract flows given the backlog in state infrastructure spending since last year.

Outlook. We anticipate job flows in Sarawak to recover this year with tender flows likely to pick up 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. Maintain Forecasts.

Maintain BUY, TP: RM1.16. Maintain BUY with same 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 6.5x 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 - 25 Mar 2021