News

Yesterday, HSL announced that together with Larsen & Toubro Limited and Larsen & Toubro Sdn Bhd; their consortium has been awarded a contract worth RM280.9m for the establishment of Samalaju 2 275/132/33kv sub-stations in Sarawak by Sarawak Energy Bhd.

HSL’s stake in the project is worth RM58.2m whereby they will be tasked for earthwork, piling, infrastructure, building, mechanical and electrical works. The contract period is 21 months with an expected completion by Dec 2017.

Comments

We are neutral on the award as it is within our FY16E replenishment estimates of RM1.0b - making up only 6% of our target. Assuming PBT margins of 10%, the contract would contribute c.RM2.5m to bottom-line per annum.

Outlook

The contract increases HSL’s outstanding orderbook to RM658.2m (previously RM600.0m) providing earnings visibility of 1–1.5 year.

We remain positive on HSL’s outlook, which will be 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 in earnings.

Rating

Maintain MARKET PERFORM

Valuation

We reiterate our MARKET PERFORM call with an unchanged TP of RM2.03 based on 13.0x FY16E PER. We believe our valuations are justifiable given that the group achieved 14.0x PER valuation when the Pan Borneo newsflow garnered investors’ interest in 2013.

HSL’s fundamentals are still strong in terms of having one of the highest margins 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 - 1 Mar 2016