HSL’s FY21 earnings of RM41m beat our and consensus expectations at 108%/111% of forecasts. Results beat due to stronger contribution from its property segment (vs expectations). HSL’s latest estimated outstanding orderbook stands at c.RM1.4bn, translating into decent level of 2.9x cover on FY21 construction revenue. We deem the recent takeover offer price of RM1.35 as generous at FY22/23 P/E multiple of 15.0x/13.6x, representing a ~25% premium to KLCON’s trading P/E multiple. Maintain forecasts. CEASE coverage following takeover offer.

Beat expectations. HSL reported 4QFY21 results with revenue of RM172.3m (14.2% QoQ, -5.2% YoY) and core PATAMI of RM13.0m (23.9% QoQ, 25.3% YoY). This brings FY21 core PATAMI to RM41.4m (+26.3%) which beat our and consensus expectations at 108%/111% of full year forecasts. Results beat due to stronger contribution from its property segment (vs expectations).

Dividends. No dividends were declared in 4QFY21. HSL has ceased dividends since the pandemic began.

QoQ. Core PATAMI rebounded by 23.9% lifted by its property segment driven by recovery in margins this quarter (segment PBT: +10ppts). While its construction segment did improve with top-line higher by 18%, PBT declined by -9% resulting from various costs pressure.

YoY. Core PATAMI increased by 25.2% despite lower construction revenue offset by stronger contribution from higher margin property segment (revenue: +12%; PBT: 26%). Its construction segment continues to be plagued by labour shortage and supply chain disruptions.

YTD. Core PATAMI increased by 26.3%, driven by higher revenue of 16.2%, which is mainly coming from higher recognition from its property segment.

Orderbook. HSL’s latest estimated outstanding orderbook stands at c.RM1.4bn, translating into decent level of 2.9x cover on FY21 construction revenue. The sole notable contract secured in FY21 has been the Leadership Training Institute project for RM131m.

To be taken private. HSL recently 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. Since the announcement, a further 0.74% stake has been acquired in the open market. We view this development positively as the current offer price of RM1.35 is generous at FY22/23 P/E multiple of 15.0x/13.6x. This also represents a ~25% 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.

Cease coverage. We are ceasing coverage on HSL post-takeover offer. As such, our forecasts, ACCEPT rating and TP of RM1.35 should no longer be used as a reference going forward.

Source: Hong Leong Investment Bank Research - 1 Mar 2022