FY16 CNP of RM56.4m was below our and consensus expectations making up 88% of both our estimates. The negative deviation was due to lower-than-expected billings from their construction division due to unforeseen delays. 1.4 sen dividend declared for 4Q16, bringing FY16 dividend to 2.4 sen which is within our estimates of 2.3 sen. Downgrade FY17E earnings by 21% and introduce FY18E earnings of RM83.1m. Downgrade to UP (from MP) with a lower TP of RM1.42 (from RM1.79).

Below expectations. FY16 CNP of RM56.4m was below our and consensus expectations making up 88% of both our estimates. The negative deviation was due to lower-than-expected billings from their construction division due to unforeseen delays. 1.4 sen dividend declared for 4Q16, bringing FY16 dividend to 2.4 sen which is within our estimates of 2.3 sen.

Results highlight. 4Q16 CNP of RM11.7m was down 28% QoQ on the back of (i) lower construction billings (-18%) from delays in major projects, (ii) lower property EBIT margins (-5.5ppt) from lower margin mix developments. We understand that the challenging nature of the jobs has caused the group numerous unforeseen technical and onsite issues, which have further delayed the progress of the projects. FY16 CNP was down 26% YoY largely due to lower construction billings (-30%) due to reasons stated above.

Major jobs causing delays. Moving into FY17, we expect its construction billings to step up as two of their major projects (namely Pan Borneo and Kuching wastewater treatment plant) secured in 1Q16 to progress into more advance stages. In terms of orderbook replenishment, we are targeting a lower replenishment of RM400m in FY17E (vs FY16’s replenishment of RM1.85b) as we expect HSL to place focus on these major contracts won, which comprise c.80% of outstanding order book.

As of 31st Dec-16, HSL’s outstanding order book stood at RM2.1b providing earnings visibility for the next 3-4 years. As for their property division, HSL’s unbilled property sales stood at c.RM150.0m with 2-3 year visibility. HSL’s property arm plans to launch c.RM100m worth of properties in FY17 comprising (i) Samariang Aman Semi-D’s (ii) VIP phase 23 and (iii) La Promenade Precinct Luxe.

Downgrade FY17E earnings. We downgrade FY17E earnings by 21% to RM70.7m after factoring for the slower billings from Pan Borneo and Kuching Wastewater projects coupled with lower margin assumptions for the said projects. Meanwhile, we introduce our FY18E earnings of RM83.1m.

Downgrade to UNDERPERFORM. Post adjustment in earnings, we lower our TP to RM1.42 (from RM1.79) based on an unchanged FY17E PER of 11x (5-year average Fwd. PER). Consequently, we downgrade HSL to UNDERPERFORM (from MP). We believe our downgrade is fair given that: (i) the bulk of their order-book from Pan Borneo and Kuching Wastewater, which are set to last till FY21 could see further delays causing compression towards margins, and (ii) replenishment prospect remains weak as no major jobs in the pipeline which further dampens earnings outlook. We believe our valuation for HSL of 11.0x FY17E PER is fair given that it is within our targeted PER range for small-mid cap contractors of 9-13x.

Source: Kenanga Research - 28 Feb 2017