9M17 CNP of RM31.9m makes up 65%/61% of our /consensus estimates which we deem broadly in line as we expect construction billings to come in stronger in 4Q. No dividends as expected. Make no changes to FY17-18E earnings estimates. Maintain MP with unchanged TP of RM1.40 based on 11x FY18E.

Broadly inline. 9M17 CNP of RM31.9m accounted for 65%/61% of our/consensus estimates which we deem broadly in line as we expect construction billings to come in stronger in 4Q from: (i) the pick-up in progress for Pan Borneo, and (ii) new contributions from Kuching Wastewater Plant as it had only commenced construction in Sept 2017 while the contract award was back in March 2016 due to earlier delays as HSL ironed out on-ground soil issues with clients. No dividends declared as expected.

Results highlight. 9M17 CNP was down 29% YoY on the back of: (i) lower revenue (-12%) as major on-going projects were at early stages, and (ii) lower construction PBT margins of 11% (-3ppt) as construction projects executed in FY17 (esp. Pan Borneo) have weaker margins vis- à-vis projects executed in FY16. 3Q17 CNP was up 16% QoQ on the back of a higher revenue (+19%) from its construction division as Pan Borneo project gradually picks up pace.

Outlook. YTD, HSL has secured RM614m worth of construction jobs, in line with our FY17E replenishment target of RM600m. These new jobs comprise the Miri Wastewater project, a vocational facility (PPKS) in Mukah, a collector road in Samalaju, a school in Miri and the recently secured X-Fab project. Their outstanding order-book currently stands at RM2.7b providing the group visibility for the next 3 years. As for their property division, unbilled property sales stood at c.RM150.0m providing 2-3 years visibility. HSL targets to launch another 1-2 phases of Precinct Luxe (total 4 phases with total GDV of RM105m; 1 phase already launched) by 1Q18. We note that construction for the new phases of Precinct Luxe has started (at c.50% completion) and billings can be recognised immediately upon launching.

Earnings unchanged. Maintain our earnings forecasts based on FY17- 18E replenishment target of RM600-400m.

Maintain our MARKET PERFORM call with an unchanged TP of RM1.40 based on FY18E 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 8-13x and their net margin of c.10% is fairly similar to peers’ average (KERJAYA, KIMLUN, MITRA).

Source: Kenanga Research - 24 Nov 2017