Last Friday, HSL announced that they have secured the Miri Wastewater Treatment plant project worth RM333.1m, slated for completion in April 2021. Despite the sizeable win, we remain NEUTRAL on the contract given that HSL’s YTD wins of RM333m is still within our FY17E replenishment target of RM400m. Hence, we make no changes to our FY17-18E earnings estimates. Maintain UP with an unchanged TP of RM1.42.

Miri Wastewater Treatment plant. Last Friday, HSL announced that they were awarded the Miri wastewater treatment plant project worth RM333.1m by the Sarawak Sewerage Services Department. The scope of works includes earthworks, construction and commissioning of the wastewater treatment plant, sewer networks, intermediate pump station and other associated works and is slated for completion in April-2021.

Sizeable win but NEUTRAL. While we were caught by surprise as we were not anticipating such a sizeable contract, we remain NEUTRAL on the contract given that HSL’s YTD wins of RM333m is still within our FY17E replenishment target of RM400m - making up 83% of our target. While our replenishment target might seem overly conservative, we note that HSL’s historical replenishment from FY10-15 ranged from RM130-550m except for their bumper year in FY16 when they secured RM1.85b worth of jobs largely from the Pan Borneo and Kuching Wastewater Treatment Plant project. Meanwhile, we also understand that this contract is one of the larger contracts within HSL’s tender list and remaining tenders are mostly smaller contracts with values <RM100m. Hence, we maintain our FY17E replenishment target of RM400m. Assuming 10% PBT margins, this project is expected to contribute c.RM6.2m to bottom-line/annum.

Outlook. For FY17, we expect its construction billings to step up as Pan Borneo and Kuching wastewater treatment plant secured in 1Q16 progresses into more advance stages. However, we remain cautious on these projects considering the challenging nature of these projects that could cause margin pressures due to onsite/technical issues. YTD, HSL’s outstanding order-book stands at RM2.4b providing earnings visibility for the next 3-4 years. As for their property division, HSL’s unbilled property sales is at c.RM150.0m with 2-3 years 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.

Maintain FY17-18E earnings. We maintain our FY17-18E earnings of RM70.1m and RM83.1m, respectively.

Maintain UNDERPERFORM. Make no changes to our UP call with unchanged TP of RM1.42, based on an unchanged FY17 PER of 11.0x. We believe our valuation for HSL at 11.0x FY17E PER is fair given that it is within our targeted PER range for small- mid cap contractors of 9-13x.

Risks to our call include: (i) higher-than-expected margins for their major jobs i.e. Pan Borneo job and Kuching Wastewater, and (ii) higher-than-expected replenishments achieved.

Source: Kenanga Research - 06 Mar 2017