1H16 CNP of RM28.3m missed our (36%) and market (34%) expectations due to slower-than-expected construction billings. HSL declared 1.0 sen interim dividend, which was within our expectation. Maintain FY17E earnings but cut FY16E earnings by 10% to account for slower billings on their major projects. Maintain MARKET PERFORM with unchanged TP of RM1.79 based on unchanged 11x FY17 PER.

Missed expectations. HSL’s 1H16 CNP of RM28.3m came in below our and consensus forecasts representing 36% and 34% of estimates, respectively. The disappointment was mainly due to slower-than-expected construction billings. For 2Q16, HSL declared 1.0 sen interim dividend, in line with our expectations.

Results Highlights. For 1H16, CNP of RM28.3m was down 23% YoY underpinned by lower construction EBITDA margins (-1.5ppt) from higher mix of open tender projects and weaker construction revenue (-33%). The weaker revenue was due to: (i) slow progressive billings as current bulk of HSL’s order book is still in initial phases, and (ii) a high base effect from 1H15, which saw the completion of several projects, leading to higher billings. 2Q16 CNP of RM12.1m was down 25% QoQ also from lower construction revenue (-25%) due to similar reasons stated above.

Outlook. Moving forward, we would expect its construction billings to step up from 4Q16 onwards as two of their major projects (namely Pan Borneo and Kuching wastewater treatment plant) secured in 1Q16 begins to pick up pace. To date, HSL has secured RM1.85b worth of projects representing 92.5% of our RM2.0b target with a remainder of RM150m to be achieved. Their outstanding order book stands at RM2.3b which will provide earnings visibility for the next 3-4 years. As for their property division, HSL’s unbilled property sales stood at c.RM120.0m with two-year visibility. We expect HSL’s property contribution to grow steadily in the near future bolstered by their La Promenade development with remaining GDV of c.RM2.0b for the next 10-15 years.

FY16E earnings downgrade. Post-results, we maintain FY17E earnings but cut FY16 earnings by 10.1% after factoring slower construction progress billings in FY16 as contributions from two major contracts that are worth over RM1.8b (c.80% of their outstanding order book) are only expected to pick up from 4Q16 onwards.

Maintain MARKET PERFORM. Despite the reduction in our FY16E earnings, we maintain MARKET PERFORM call with an unchanged TP of RM1.79 based on unchanged FY17 PER of 11x (5 year average Fwd. PER). We believe valuations are fair as it is within our targeted PER range for small-mid cap contractors of 9-13x.

Source: Kenanga Research - 19 Aug 2016