We visited Sarawak recently to obtain progress updates on the on-going construction of Pan Borneo and the developments at Samalaju Industrial Park, and we gathered that: (i) the construction Pan Borneo is slightly behind schedule with construction progress of various companies ranging from c.2-15%, and (ii) a pick-up in construction progress where meaningful contributions would be seen is likely from 2H18.

Meanwhile, we note that Samalaju Industrial Park’s development is progressing well with Samalaju Port (Phase 1) recently starting operations in June 2017. Currently, the major industries that are already operating in Samalaju Industrial Park are: (i) Press Metal with 2 phases already in operations, (ii) OM Sarawak, (iii) Tokuyama, (iv) Sakura Resources, (v) Pertama Industries, and (vi) SIG. In the near future, the Malaysian Phosphates Additives (MPA) plant would commence its operations in c.1Q19 as it is still under construction at earthworks stage.

Hock Seng Lee (Maintain MP with unchanged TP of RM1.50)

Pan Borneo and Kuching City Central Wastewater Management System updates. We met up with Dato Paul (MD) and Mr. Augustine (General Manager) of HSL where we were updated on the progression of Pan Borneo project and Kuching Wastewater Management System construction. We note that these two major projects make up 67% of their RM2.9b outstanding order-book. YTD, HSL has completed c.10% of Pan Borneo highway construction. While we understand that 10% completion for the Pan Borneo highway project is on track, meaningful contributions are only expected to pick up from 2H18 onwards. As for the Kuching Wastewater Management System, we understand that work progress is currently minimal despite HSL securing the contract award last year as they are in the midst of ironing out further details in relation to the in-site ground conditions with the client. This has led to the project timeline being pushed back and is a negative surprise to us given that it would mean less contributions in FY17-FY18 vs our expectations - leading to some downside risks towards our FY17-18E earnings.

La Promenade visit. We visited HSL's La Promenade site which spans 200 acres. As of current, HSL has launched 2 subprojects within the vicinity namely Precinct Premiere and Precinct Luxe. The pioneering phase - Precinct Premiere consists of 2 phases whereby Phase 1 comprises 44 detached bungalows and semi-d's while Phase 2 comprises another 24 detached bungalows, semi-d's and quadruplexes with a total GDV of RM113m. Precinct Luxe comprises 112 super link homes (group under 4 phases) with exclusive clubhouse facilities including a gym, swimming pool and a children's playground with total GDV value of c.RM105m. Of the above, Phase 1 of Precinct Premiere has reached the practical completion and is expected to hand over to buyers tentatively by first week of September. Phase 1 of Precinct Luxe is at the advance stage of completion and is expected to complete by end of 2017. All other phases of Precinct Luxe is progressing well.

Company outlook. YTD, HSL’s outstanding order-book stands at RM2.4b providing the group visibility for the next 3 years. As for their property division, HSL’s unbilled property sales at c.RM150.0m provide 2-3 year visibility.

FY17-18E earnings downside risk. Post visit, we are anticipating HSL’s results to come in below our expectations given that their Kuching Wastewater plant timeline has been postponed vs. our initial expectations. That said, we make no changes to our FY17-18E estimates of RM61.4-74.3m for now pending 2Q17 results on the 22nd August 2017. We note that should we push back the project by one year, we are expecting FY17-18E CNPs to come down by 9-6% to RM56-70m, respectively.

Maintain our MP call with unchanged TP of RM1.50. For now, we maintain our TP of RM1.50, which is based on an unchanged PER of 11x. Should we trim our FY17-18E earnings by 9%-6%, we note that our TP would be reduced to RM1.40 which still commands a MP call based on the last closing price of RM1.49. 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 their net margin of c.10% is failry similar to peers’ average (KERJAYA, KIMLUN, MITRA).

Bintulu Port - Samalaju Ports Update (Maintain MP with unchanged TP of RM6.60)

We met up with BIPORT’s management team at their HQ in Tanjung Kidurong led by Daiana Luna Suip (Group Finance General Manager) to obtain updates. Currently, BIPORT provides port services at: (i) Bintulu Port, and (ii) Samalaju Port and provision of bulking installation facilities and services for palm oil products. They hold a 30-year concession from 1st Jan 1993 till 31st Dec 2022 with the option to renew for another 30 years while Samalaju Port has a 40-year concession from Jun 2017 and the option to extend another 20 years once the 40-year concession ends. Phase 1 of Samalaju Ports was recently completed and commenced operations from June 2017, serving industries at the Samalaju Industrial Park such as PMETAL, OM Sarawak, Sakura Ferroalloys, Pertama Ferroalloys and Tokuyama. Moving forward, Samalaju Ports expects the commencement of MPA (Malaysian Phospates Additives S/B) to add on cargo tonnage towards their existing 0.23m tonnes of cargo for 1Q17. Note that Samalaju Port has a tonnage capacity of 18.0m tonnes for Phase 1. Having said that, we expect Samalaju to undergo losses initially, dragged down by fixed depreciation and amortisation costs, with the port expected to achieve meaningful utilisations only in 2-3 years’ time. Post visit, we make no changes to BIPORT’s FY17-18E CNPs of RM150.9m-RM158.2m. Maintain MP with an unchanged DDM-derived TP of RM6.60 based on WACC assumption of 5.2%. Risks to our call include: (i) lower-than-expected losses contribution from Samalaju Port, and (ii) higher-than-forecasted cargo volume throughput growth.

PMETAL Samalaju Plant Visit (Maintain OP with unchanged TP of RM4.05)

We visited PMETAL’s Samalaju plant whereby we were briefed on their smelting plant operations. This is the plant where alumina (raw material) is converted into aluminium in the form of Ingots – P1020 ingots or A356.2 ingots. The Samalaju plant has a total smelting capacity of 640k MT of aluminium/annum. Meanwhile, their Mukah Plant has a smelting capacity of 120k MT aluminium/annum. The process starts out with alumina being imported through Samalaju Ports which is a stone’s throw away from PMETAL’s smelting plant. We note that almost all their sources of alumina are imported from Australia. Currently, they are constructing a conveyor facility whereby alumina can be transported from the port directly into the plant hence eliminating the need for tankers to go back and forth to transport the alumina into the silos. Next, the alumina will be fed into pots whereby these alumina will undergo an electrolytic process for the alumina to be separated into aluminium (molten) and carbon dioxide. The molten aluminium is then extracted from the pots and transported to a casting house whereby the aluminium will be casted into 10kgs ingots, 22 kgs ingots or aluminium wire rods. We note that the electric power to conduct the electrolysis process is being generated by the Bakun Dam/Murum Dam. We reiterate our OP call with a TP of RM4.05 based on CY18 PER of 18x. We remain strongly positive on PMETAL’s short-term price prospects as aluminium prices hit fresh 3-year high, while long-term earnings outlook is supported by continued cost efficiencies and higher proportion of high-margin products.

Source: Kenanga Research - 18 Aug 2017