HSL has received an unconditional takeover notice at RM1.35/share. Joint ultimate offerors hold a cumulative 84.2% stake in the company and offer is therefore unconditional on the minimum level of acceptances due to their >50% stake. We view this development positively as the current offer price of RM1.35 is 25% above our previous target price of RM1.08 and represents a 23% premium to KLCON’s trading P/E multiple which we deem to be stretched valuations, considering that HSL is a small cap contractor. Maintain forecasts. We advise investors to ACCEPT the offer at RM1.35. While we do expect gradually improving earnings execution and recovering job flows such optimism is more than priced in at the offer price.

NEWSBREAK

HSL announced that it has received a notice of unconditional voluntary take-over offer to acquire all the remaining ordinary shares in HSL not already owned by the joint ultimate offerors (15.8%), comprising of Dato Yu Chee Hoe, Tang Sing Ngiik, Vincent Yu Yuong Yih and Tony Yu Yuong Wee for a cash offer per share of RM1.35. The joint ultimate offerors currently hold an 84.2% stake in the company. The offer is unconditional on the minimum level of acceptances as the joint offerors have >50% stake.

HLIB’S VIEW

Good price. We view this development positively as the current offer price of RM1.35 is 25% above our previous target price of RM1.08. At RM1.35, HSL valuations are generous at FY21/22/23 P/E multiple of 20.6x/15.0x/13.6x. This also represents a 23% premium to KLCON’s trading P/E multiple which we deem to be stretched valuations, considering that HSL is a small cap contractor.

Forecast. Maintained. We advise investors to ACCEPT the offer at RM1.35. The construction segment is still plagued by various risks namely high materials cost, labour shortages and political fluidity. While we do expect gradually improving earnings execution and recovering job flows in Sarawak moving ahead, we believe such optimism is more than priced in at the offer price of RM1.35.

Source: Hong Leong Investment Bank Research - 18 Feb 2022