Period

1Q15

Actual vs. Expectations

1Q15 core net profit (CNP) of RM19.5m came in within expectations, making up 20.9% and 21.5% of our and consensus full-year estimates.

In terms of job wins, YTD, the group has secured RM105.0m of new jobs which accounts for 16.7% of our new contracts assumption of RM600.0m. This is in line with our expectation as we expect HSL to win most of the projects in 2H15.

Dividends

As expected no dividend was proposed.

Key Results Highlights

QoQ, 1Q15 revenue and CNP both fell marginally by 3% dragged down by: (i) lower property earnings, and (ii) lower construction billings. On a positive note, 1Q15 EBITDA construction margin increased by 1ppts to 14%. The improved margin could be due to its current projects starting to enter the mid-stage of construction.

YoY, 1Q15 earnings rose by 19% thanks to construction division. The segment’s 1Q15 revenue and EBITDA rose by 66% and 23%, respectively, thanks to higher progress of construction projects. This is despite the lower construction margins (i.e. 13% vs 19% in 1Q14) owing to lower profit margin in open tender projects and general increase in cost of construction. However, it is important to note that its margin is still way above the industry average EBIT margin of 7%.

Outlook

The group updated that it currently has about RM870m worth of outstanding orderbook, which provide earnings visibility for at least two years.

Bright jobs replenishment prospects. We believe this year could be a big year for HSL as we understand that several high-profile projects in Sarawak are being rolled out. Among the projects are: (i) Phase 2 Kuching Centralised Wastewater System (RM700m), (ii) Panborneo highway (RM27b), and (iii) various infrastructure projects (road and water) in the SCORE area (Samalaju, Mukah, Tg Manis). Being a prominent contractor in Sarawak, we believe HSL could be one of the prime beneficiaries of these projects.

Change to Forecasts

Unchanged.

Rating

Maintain OUTPERFORM

Valuation

HSL’s fundamentals are still strong i.e. still achieved one of the highest margins in the construction space, strong balance sheet with net cash position (28.0 sen/share) and being one of the prime beneficiaries of the Sarawak’s infrastructure growth story.

We adjusted our Target Price to RM2.18 (from RM2.02 previously) after rolling over our valuation benchmark to FY16E. Our TP is based on unchanged FY16E PER of 12x in line with its small-mid cap peers’ range of 10-14x.

Risks to Our Call

Failure to meet new contracts assumption.

Higher-than-expected input costs.

Slower-than-expected construction works progress

Source: Kenanga Research - 22 May 2015