News  HSL has secured a project at Samalaju, Bintulu, Sarawak amounting to RM51.9m from Kemena Holding Sdn Bhd.

 The scope of works includes piling, earthworks, drainage, raw water intake facilities and related piping works and M&E works. The contract is scheduled to be completed by 3Q15.

Comments  We are positive on HSL’s continuous job flows. YTD, HSL has secured RM181m worth of contract or 30% of our FY14 new jobs asumption of RM600m. We estimate this contract will boost the group’s orderbook to about RM1.27b.

 Assuming a net margin of 15% (normal HSL’s net margins), this project will contribute about RM7.7m net profit per annum until FY15.

Outlook  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 contracts per annum since 2012.

 As for this year and the next, we expect HSL to secure 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.

Forecast  Unchanged.

Rating Maintain OUTPERFORM

 We believe HSL’s strong fundamentals have yet to be fully-priced in. The stock offers potential total return of 18% (including dividend yield 2.5%). We like HSL as: (i) it is one of the biggest contractors in Sarawak majoring in marine engineering, (ii) it has consistently secured more than RM500m worth of jobs per annum since 2012, (iii) it posses bright earnings visibility driven by outstanding orderbook of RM1.22b with expected new orders of RM600m every year, and (iv) it has strong financials, i.e. amongst the highest margins in construction sector and strong cash pile (32 sen/share) with no borrowings.

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

Risks to Our Call Failure to meet orderbook replenishment target of RM600m

 Higher-than-expected input costs.

 Slower-than-expected construction works progress

Source: Kenanga