HSL’s 1QFY21 earnings of RM9m (-13% QoQ, 20%YoY) were below our and consensus expectations due to lower than expected margins. Operational momentum was plagued by imposition of restrictions. Outstanding order book of RM1.8bn translates into a healthy 4.0x cover. Given an accommodating state infra allocation, we anticipate return of job flows when cases dissipates. Tweak FY21-22 forecasts by -8%. Maintain BUY with lower TP of RM1.08 pegged to an unchanged 12x P/E multiple. The stock trades at an FY21 ex-cash P/E multiple of 7.1x with a net cash per share of RM0.34

Below expectations. HSL reported 1QFY21 results with revenue of RM159.5m (- 12% QoQ, +42% YoY) and core earnings of RM9.1m (-13% QoQ, +20% YoY). The core earnings were below both our and consensus expectations accounting for 16%/17% of full year forecast.

Deviations. Results miss was driven by margin shortfall resulting from various labour shortages and higher material costs and logistics constraints.

Dividends. No dividends were declared in 1QFY21 (1QFY20: nil).

QoQ. Core earnings declined by -13% in tandem with lower revenue (-12%) as productivity levels fell on the back of MCO2.0 imposition with the surging cases in Sarawak in 1QFY21. On the brighter side, work momentum did pick up prior to MCO2.0 and should recover once vaccination picks up steam.

YoY. 1QFY21 core earnings climbed by 20% aided by much stronger revenue (+42%). Both construction (+40%) and property (+55%) segments came back mainly due to low base effect having seen MCO1.0 imposed on 18 March 2020. Offsetting the topline recovery were lower PAT margins (-1ppts) emanating from labour shortages and higher material costs and logistics constraints. By our estimates, average rebar prices are roughly 30% higher in 1QFY21 (vs 1QFY20).

Orderbook. HSL’s latest estimated outstanding orderbook stands at c.RM1.8bn, translating into healthy level of 4.0x cover on FY20 construction revenue. In FY21, HSL has secured a RM131 contract for the construction and completion of Leadership Training Institute for Sarawak Civil Service (Phase 1) in Kuching. While the company is on pace to meet our RM500m assumptions for this year, we expect positive cases resurgence could dampen the pace of job flows in the state despite the infra budget backlog.

Outlook. Job flows in Sarawak could face near term hiccup as cases continue to escalate. Nonetheless, we take comfort in state’s infra backlog which should lead to more opportunities when mass vaccinations pick up. 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. We cut FY21-22 earnings by -8.0% and -8.6% as we slow down billings assumptions and tweak margins slightly downwards. Introduce FY23 earnings of RM49.2m.

Maintain BUY, TP: RM1.08. Maintain BUY with lower TP of RM1.08, pegged to an unchanged 12x PE multiple on FY21 EPS. The stock trades at an FY21 ex-cash P/E multiple of 7.1x with a net cash per share of RM0.34. Going forward, we expect recovering jobs flow given Sarawak’s infrastructure friendly budget.

Source: Hong Leong Investment Bank Research - 27 May 2021