Period  1Q14

Actual vs. Expectations The 1Q14 net profit of RM16.4m makes up 17% of our fullyear forecast and that of market consensus. We deem 1Q14 results to be within our expectation as: (i) billing progress was lower as most of HSL’s projects are currently at the early stages, hence progress will only pick up in later part of the year, (ii) 1Q is traditionally a weak quarter compared to the other subsequent quarters due to adverse weather condition and festive season. Hence, we expect most of

HSL’s FY14 earnings to be delivered in upcoming quarters, especially in 2H14.

Dividends  No dividend was declared in 1Q14

Key Results Highlights QoQ, HSL’s 1Q14 revenue and net profit declined by 19% and 26%, respectively, dragged down by slower construction billings as most of its projects are currently at the commencement stages of construction. Recall, HSL’s

orderbook increased significantly in FY13 after securing an all-time high of RM628m new contracts that year. Furthermore, the 1Q is traditionally weaker as compared to the rest of the quarters due to weather condition and festive season.

 YoY, HSL’s revenue and net profit decreased by 14% and 16% due to lower revenue following slow progress of construction due to fresh orderbook profile. Nonetheless, EBIT margin improved by 1% thanks to higher property division’s margin.

Outlook  Management updated that HSL’s unbilled orderbook currently stands at RM1.3b which we expect will last 2-3 years. YTD, it has secured RM129m worth of contracts, accounting for 22% of our assumed orderbook of RM600m.

 Given its status as the market leader coupled with the vibrant Sarawak’s growth story, we reaffirm our view that HSL is one of the major beneficiaries of the sustained development of infrastructure projects in Sarawak, driven by SCORE and the state’s urbanization. This is evidenced from it consistently securing more than RM500m worth of jobs per annum since 2012.

 As for this year and the next, we expect HSL to secure at least another RM600m worth of contracts, driven by SCORE-related projects (i.e. Samalaju, Mukah and Tanjung Manis) and Phase 2 of Kuching Centralised Wastewater System.

Change to Forecasts Maintained.

Rating Maintain OUTPERFORM We believe HSL’s strong fundamentals have yet to be fullypriced in. The stock offers potential total return of 15.8% (including dividend yield of 2.5%).

Valuation  We reiterate our Target Price of RM2.31 based on Fwd-PER of 11x FY15 EPS.

Risks  Failure to meet orderbook replenishment target of RM600m

 Higher-than-expected input costs.

 Slower-than-expected construction works progress

Source: Kenanga