1Q17 CNP of RM11.3m was below our and consensus expectations making up 16% and 15% of our full-year earnings estimates respectively. The negative deviation was due to lower-than-expected billings from their construction division due to slower-than-expected pick up in major jobs secured. As expected, no dividends declared. Downgrade FY17-18 earnings by 13%-11%. Maintain UP with higher TP of RM1.50 after rolling valuation base year forward.

Below expectations. 1Q17 CNP of RM11.3m was below ours and consensus expectations making up 16% and 15% of our estimates respectively. The negative deviation was due to lower-than-expected billings from their construction division due to slower-than-expected pick up in major jobs (Pan Borneo and Kuching Wastewater) secured. As expected, no dividends declared for 1Q17.

Results highlight. 1Q17 CNP of RM11.7m was down 4% QoQ on the back of a lower revenue (-7%) mainly due to lower construction billings (-8%) from delays in Pan Borneo and Kuching Wastewater project. We understand that the challenging nature of the Pan Borneo job has caused the group unforeseen technical and onsite issues, which have further delayed the progress of the projects. 1Q17 CNP was down 31% YoY largely due to lower construction billings (-25%) due to reasons stated above.

Progress likely to pick up in 2H17. Moving forward, we expect its construction billings to step up gradually from 2H17 onwards as two of their major projects, i.e. Pan Borneo and Kuching wastewater treatment plant that were secured back in 1Q16, as the progress for these projects move into more advance stages. Hence, we still expect its 2Q17 earnings to be weak and we are cautious with these projects as there are further earnings risks due to margin pressures unforeseen issues. YTD, HSL has secured RM333m worth of contract, which is within our FY17 replenishment target of RM400m – making up 83% of target. Outstanding orderbook stood at RM2.4b providing the group visibility for the next 3 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 earnings. We downgrade FY17-18E earnings by 13%- 11% to RM61.4m and RM74.3m respectively after factoring for the slower billings from Pan Borneo and Kuching Wastewater projects.

Maintain UNDERPERFORM. Despite the downgrade to earnings, we raise our TP to RM1.50 (from RM1.42) after rolling forward valuation base year to FY18. Our TP of RM1.50 is based on an unchanged PER of 11x. We believe our valuation for HSL of 11.0x is fair given that it is within our targeted PER range for small-mid cap contractors of 9-13x and that their net margins of c.10% is the same as peers average (KERJAYA, KIMLUN, MITRA).

Source: Kenanga Research - 26 May 2017