HSL’s 1HFY21 earnings of RM17.9m were within our but below consensus expectations at 47%/40% of forecasts. Performance was weaker sequentially due to Phase 1 restrictions. Despite expectations of lingering operational difficulties, we remain positive as Sarawak should benefit from accommodative development allocations. Upcoming Sarawak Metro (RM6bn) could call for tenders by 1H22 and a multitude of other projects could bring more job opportunities going forward. Maintain forecasts. Maintain BUY with unchanged TP of RM1.08, after pegging FY22 EPS to 12x P/E multiple. The stock trades at an FY22 ex-cash P/E multiple of 6.9x with a net cash/share of RM0.35.

Within expectations. HSL reported 2QFY21 results with revenue of RM142.8m (- 10.5% QoQ, 71.9% YoY) and core PATAMI of RM8.8m (-3.7% QoQ, 121.6% YoY). This brings 1HFY21 core PATAMI to RM17.9m (+55.1%) which were within our but below consensus expectations at 47%/40% of full year forecasts.

Dividends. No dividends were declared in 2QFY21 (1HFY21: nil; 1HFY20: nil).

QoQ. Core PATAMI declined marginally by -3.7% dragged by lower revenue (-10.5%) as Phase 1 was enforced resulting in lower degree of operations and supply chain difficulties.

YoY/YTD. 2QFY21 and 1HFY21 core PATAMI surged by 121.6%/55.1% riding on revenue recovery of 71.9%/54.7% seen across both construction and property segments due to low base effect from MCO1.0.

Orderbook. HSL’s latest estimated outstanding orderbook stands at c.RM1.7bn, translating into healthy level of 3.5x cover on FY20 construction revenue. The sole notable contract secured in FY21 has been the Leadership Training Institute project for RM131m. Unsurprisingly, pandemic resurgence have dampen job flows since.

Outlook. Despite expectations of lingering operational difficulties, we remain positive on HSL’s prospects as we anticipate accommodative development allocations for the state in the upcoming Budget-22 and 12MP. One sizable incoming project slated for civil works tenders next year is the Sarawak Metro (Phase 1), costing RM6bn. Assuming no delays, earliest construction phase could start in 3Q22, pointing towards tender rollouts by 1H22. To our understanding, the project consists of 2 lines stretching 53km of which 80% are elevated (at-grade: 17%; underpass: 3%). Given HSL’s experience in bridge and flyover construction we expect the company’s participation in construction of elevated viaducts and stations. Other projects receiving allocations from state budget include Coastal road, Trunk road, Lawas-Limbang road, water supply grid as well as numerous roads and bridges could also present job opportunities.

Forecast. Maintain forecasts as earnings are inline.

Maintain BUY, TP: RM1.08. Maintain BUY with unchanged TP of RM1.08, pegged to an unchanged 12x PE multiple on FY22 EPS. The stock trades at an FY22 ex-cash P/E multiple of 6.9x with a net cash/share of RM0.35. Going forward, we expect HSL to be a beneficiary of recovering jobs flow in Sarawak.

Source: Hong Leong Investment Bank Research - 24 Sept 2021