Period  2Q14/1H14

Actual vs. Expectations The 1H14 net profit of RM35.4m make up 38% and 37% of ours and consensus’ forecast respectively. The weaker 1H14 was expected as its construction billing progress has just started showing an improvement from 1Q, indicating the group will only recognise more billings in 2H14 (due to the beginning-to-mid phase of the S-curve revenue recognition).

Dividends  First interim dividend of 1.2 sen was proposed. We expect another 4.0 sen to be declared in 4Q14.

Key Results Highlights QoQ, 2Q14 revenue and net profit both rose, by 21% and 16%, respectively, mainly driven by its bread and butter construction division. This is thanks to HSL’s strong orderbook progress. We believe some of the group’s projects secured last year have started to hit the active phase towards the completion stage. Recall, its orderbook increased significantly to more than RM1.0b in FY13 with new RM628m new contracts.

 YoY, while 2Q14 revenue was flat at RM140m, net profit fell 16% mainly due to the weaker property segment where its 2Q14 revenue and PBT declined significantly by 60% and 65%, respectively. During 2Q13, property billings were stronger from higher sales volume secured.

 YTD, 1H14 revenue and net profit dipped, dragged down by both construction and property divisions. As for the construction division, some of the projects were completed in 1H13 and hence the better billings and margins. As for the property segment, billings were higher in 1H13.

Outlook  Given its status as the market leader in Sarawak coupled with the vibrant state 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 HSL consistently securing more than RM500m worth of contracts per annum since 2012.

 As for this year and the next, we expect HSL to secure RM600m worth of new jobs (so far RM181m YTD), driven by SCORE-related projects (i.e. Samalaju, Mukah and Tanjung Manis) and Phase 2 of Kuching Centralised Wastewater System.

Change to Forecasts Unchanged.

Rating Maintain OUTPERFORM

 We believe HSL’s strong fundamentals have yet to be fullypriced in. We like HSL as it: (i) is one of the biggest contractors in Sarawak, (ii) has consistently secured more than RM500m worth of jobs per annum since 2012, (iii) posses bright earnings visibility driven by unbilled orderbook of RM1.1b, and (iv) 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. Target PER of 11x is in line with its 5-year average historical PER.

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