Period  3Q14/9M14

Actual vs. Expectations The 9M14 net profit of RM56.8m came in below expectations, making up 60% and 62% of our and consensus’, full-year FY14 net profit estimates.

 The negative variance was due to: (i) slightly lower-thanexpected construction margins (18% vs our forecast’s 19%) following higher material and labor costs incurred so far this year, and (ii) lower-than-expected property billings due to slower launches this year.

Dividends  None as expected.

Key Results Highlights QoQ, 3Q14 revenue and net profit both rose by 11% and 13%, respectively, mainly driven by construction division following orderbook progress.

 YoY, 3Q14 net profit was flat (+3%) mainly dragged down by weaker property segment performance. The division’s revenue and net profit declined by 37% and 40%, respectively, no thanks to its slower launches this year. Nonetheless, the slower launches are understandable as the group is now adopting build-and-sell concept, which would fetch higher take-ups and margins.

 YTD, net profit was down by 10%, dragged down by construction segment’s lower margins following higher materials and labor costs.

Outlook  The group updated that it is currently has about RM1.1b worth of outstanding orderbook, which provide earnings visibility for at least two years.

 Next year could be a big year for HSL. So far, YTD, the group has secured c.RM310m worth of new contracts. Although this amount is below our forecast of RM600m, we believe next year could be a big year for HSL as we understand that several high-profile projects in Sarawak will take place. Among the projects are: (i) Phase 2 Kuching Centralised Wastewater System (RM700m), (ii) Pan-borneo highway (RM27b), and (iii) various infrastructure (road and water) projects in SCORE area (Samalaju, Mukah, Tg Manis). Being a prominent contractor in Sarawak, we believe HSL is one of the prime beneficiaries of these projects.

Change to Forecasts Revised downward FY14-FY15 earnings forecasts by 15%- 13% after: (i) adjusting our FY14 new contracts assumption to RM350m from RM600m this year, (ii) revising lower construction margins to 18% from 19%, and (iii) lowering our property sales forecasts in FY14-FY15 (RM30m from RM50m). Note that our forecast still conservative as we have just assumed HSL will secure RM600m worth of new contracts in FY15 despite a number of sizeable projects to take place next year.

Rating Maintain OUTPERFORM

 We like HSL as it has strong fundamentals (net cash position, amongst the highest margins in construction space) and more importantly, the group is one of the prime beneficiaries of the Sarawak’s infrastructure growth story.

Valuation  Post earnings revision, we revised downwards our Target Price to RM2.20 based on FY15PER of 12x in line with its mid-cap peers’ range of 12-14x.

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

 Higher-than-expected input costs.

 Slower-than-expected construction works progress

 Slower-than-expected property sales

Source: Kenanga