Period

4Q15/FY15

Actual vs. Expectations

FY15 core net profit (CNP) of RM76.2m came in above our expectations but within consensus, accounting for 106% and 97% of expectations, respectively.

The positive variance against our estimates is mainly attributable to higher-than-expected progressive billings.

Dividends

A final tax exempted dividend of 1.4 cents was declared, bringing FY15 payout to 2.4 cents (1.2% yield) which is below our expected payout of 4.0 cents.

Key Results Highlights

YoY, FY15 CNP decreased marginally by 1% despite the 8% increase in revenue attributable to the compression in pre-tax margins by 2ppt to 15% due to lower margin jobs being executed, higher administrative expenses (+13%) and lower finance income (-22%).

QoQ, 4Q15 CNP increased 21%, driven by two factors; (i) its property division, which registered a stellar revenue growth of 288% due to the previous quarter’s low base effect, and (ii) expansion in EBITDA margins by 3ppt to 19% due to lower construction cost.

Outlook

HSL’s outstanding orderbook sits at RM600.0m providing the group an earnings visibility for approximately 1 year. To recap, HSL’s orderbook replenishment of RM275m in FY15 was disappointing as it only made up 61% of our RM450m target.

Nonetheless, we strongly believe that FY16 will be a significant year for HSL, underpinned by the potential contracts from several high-profile projects in Sarawak that is expected to be rolled out in 1H16. Among these projects are: (i) Phase 2 Kuching Centralised Wastewater System (RM700m), (ii) Pan-Borneo highway (RM28.9b), and (iii) various infrastructure projects (road and water) in the SCORE area (Samalaju, Mukah, Tg Manis).

Change to Forecasts

No changes to FY16E earnings and we introduce our FY17E core net profit of RM89.6m.

Rating

Maintain MARKET PERFORM

Valuation

We reiterate our MARKET PERFORM call on HSL with an unchanged target price of RM2.03 based 13x FY16E PER. We believe that our valuation is justifiable, given that the group had managed to achieve a maximum of 14x Fwd. PER valuation when the Pan Borneo news garnered investors’ interest in 2013 i.e. investors expect HSL to secure some packages. It also means failing to secure such packages or delays in awards may increase downside risks for the stock.

Nonetheless, HSL is one of the few contractors who are able to generate double-digit profit margin in the construction space, while its current outstanding orderbook provides earnings visibility for the next one year.

Risks

Failure to meet new contracts assumption.

Higher-than-expected input costs.

Slower-than-expected construction works progress.

Source: Kenanga Research - 26 Feb 2016