1Q16 core earnings of RM16.3m missed our (17%) and market (17%) expectations due to slower-than-expected construction billings. No dividends as expected. FY16E/FY17E earnings trimmed by 16%/14% on lower margins and slower billings for on-going projects. Post results announcement, we roll forward valuation to FY17E and ascribe a lower valuation basis of 11.0x (13.0x previously). Hence, we lower TP to RM1.79 while maintaining MARKET PERFORM (previously RM2.19; MP).

Missed expectations. HSL’s 1Q16 CNP of RM16.3m came in below our and consensus forecasts representing 17% of both estimates. The disappointment was mainly due to slower-than-expected construction billings.

Slower billings from new projects. For 3M16, CNP was down 17% YoY underpinned by weaker topline which decreased 24% due to: (i) slower progress billings as HSL’s current bulk of orderbook was secured in 1Q16, which is still in initial phases coupled with (ii) a high base effect from 1Q15, which saw the completion of several projects, which led to higher billings.

Lower construction margins. 1Q16 CNP was down 25% QoQ due to 11% drop in revenue with reasons stated above and a 2.8ppt dip in EBITDA margins dragged down by its construction division due to: (i) higher mix of projects secured through open bidding translating to lower margins, and (ii) higher building material cost. We note that despite the shortfall in construction billings, HSL’s property division’s EBITDA grew 57% with margins up 3.1ppt on the back of a 44% increase in property billings mainly from their high-end “la Promenade” project which was launched in 3Q15. Outlook. Moving forward, we expect construction progress billings to step up from the advancement of their RM2.4b outstanding orderbook providing earnings visibility for the next 3-4 years. We remain slightly cautious, albeit its healthy orderbook as we foresee further margin compressions should projects that are won through open bidding are not well managed. Year-to-date, HSL has secured RM1.8b worth of projects representing 91.4% of our RM2.0b target with a remainder of RM172m to be achieved. With unbilled property sales of c.RM60m coupled with continued launches from la Promenade and a new planned industrial park (GDV of c.RM200m) from 2Q16 onwards, HSL’s property contribution remains steady in the near future. Nonetheless, we note that property earnings still remain a minor portion of earnings making up only 9% of 1Q16 PBT.

Earnings cut. Post result, we cut our earnings for FY16E/FY17E by 15.5%/13.9% to RM78.8m/RM89.2m after factoring in slower progress billings and lower margins for its on-going projects.

Lowering valuations and rolling valuation to FY17E. Following our earnings revision, we also lower our valuation basis from previously 13.0x to 11.0x in which we believe is justifiable as 11.0x is its 5-year average Fwd. PER after the earnings disappointment coupled with lower margins ahead. Hence, we lower our TP to RM1.79 with an unchanged MP call (previously RM2.19; MP) based on PER of 11.0x after rolling our valuation base year forward to FY17E. 

Source: Kenanga Research - 20 May 2016