News

Last week, HSL announced that their 70:30 JV with Dhaya Maju Infrastructure (Asia) Sdn Bhd has secured a package of Pan Borneo Highway (WPC7) worth RM1.7b which comprise 76km of development and upgrade works from (i) Bintagor Junction to Julau Junction, and (ii) Sibu Airport to Sg.Kua Bridge.

The scope of works includes earth works, piling, drainage works, road works, interchanges, bridges and related M&E works with a contract period of 51 months.

Comments

We were not entirely surprised by the contract award, as we had been anticipating for it earlier. However, HSL’s 70% stake of RM1.2b for WPC7 brings its total orderbook replenishment for FY16 to RM1.8b, surpassing our initial FY16E replenishment target of RM1.5b by 22%. Hence, we increase our FY16E replenishment target to RM2.0b, with a remainder of RM172m to be achieved in FY16.

Assuming a conservative pre-tax margin of 7%, we WPC7 is expected to contribute c.RM14.8m to its bottom-line per annum.

Outlook

Moving forward, HSL’s position as a Sarawak-based contractor will continue to benefit from contract flows as Sarawak is currently undergoing a major economic transformation. We look forward to them securing more jobs, especially infrastructure works within the SCORE area.

With the WPC7 package of the Pan Borneo Highway project, we expect HSL to focus on margins delivery as their current outstanding orderbook stands at c.RM2.4b (previously RM1.2b) providing sustainable earnings visibility for the next 3-4 years.

Change to Forecasts

Following this award, we increase our FY16E orderbook replenishment target by another RM500m for FY16 totalling to RM2.0b with a remaining RM172m to be achieved. No changes to our FY16E earnings, as we have a shorter recognition period for our initial replenishment assumptions, i.e. 36 months as compared to 51 months for WPC7. That said we raised our FY17E earning higher by 4.4%, on the back of the higher replenishment target.

Rating

Maintain MARKET PERFORM

Valuation

We reiterate our MARKET PERFORM call with an unchanged TP of RM2.19 based on 13.0x FY16E PER. We believe our valuations are justifiable as the group had achieved 14.0x PER valuation when the Pan Borneo Highway news flow garnered investors’ interest in 2013 coupled with their high construction margins against peers.

Risks

Failure to meet new contracts assumption.

Higher-than-expected input costs.

Slower-than-expected construction works progress

Source: Kenanga Research - 21 Mar 2016