9M16 CNP of RM44.7m missed our (63%) and market (55%) expectations due to slower-than-expected construction billings from major projects secured in 1Q16. No dividends declared as expected. Maintain FY17E earnings but cut FY16E earnings by 10% to account for slower billings on their major projects in FY16. Maintain MARKET PERFORM with unchanged TP of RM1.79 based on unchanged 11x FY17 PER.

Missed expectations. 9M16 CNP of RM44.7m came in below our and consensus forecasts representing 63% and 55% of estimates, respectively. The disappointment was mainly due to slower-thanexpected construction billings. No dividend declared in this quarter as expected.

Results Highlights. For 9M16, CNP of RM44.7m was down 18%

YoY underpinned by lower construction EBITDA margins (-1.1ppt) and weaker construction revenue (-29%). The weaker revenue was due to: (i) slow progressive billings as the current bulk of order book secured in FY16 is still in initial phases, and (ii) a high base effect from 9M15, which saw the completion of several projects, leading to higher billings. 3Q16 CNP of RM16.3m increased 35%

QoQ from higher construction revenue (+24%) as Pan Borneo picked up pace coupled with higher property revenue (+52%) as property billings advanced from on-going projects.

Outlook. Moving forward, we expect its construction billings to step up from FY17 onwards as two of their major projects (namely Pan Borneo and Kuching wastewater treatment plant) secured in 1Q16 begin to pick up momentum. 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 RM2.2b which will provide earnings visibility for the next 3-4 years. As for their property division, HSL’s unbilled property sales stood at c.RM170.0m with 2-3 year visibility. We expect HSL’s property contribution to grow steadily in the near future bolstered by their La Promenade development with total GDV of c.RM2.0b for the next 10 years.

FY16E earnings downgrade. As we only expect major construction works for Pan Borneo and Kuching wastewater (c.80% of outstanding order book) to pick up from FY17, we lower our FY16 earnings by 10% after accounting for slower billings in FY16 while maintaining FY17 numbers.

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 valuation is fair as it is within our targeted PER range for small-mid cap contractors of 9- 13x.

Source: Kenanga Research - 25 Nov 2016