FY17 CNP of RM46.6m came within our/consensus estimates at 95%/101%. A 1.4 sen dividend was declared in 4Q17 bringing FY17 dividend to 2.4 sen within our 2.2 sen estimate. Maintain FY18E earnings while introducing FY19E earnings of RM78m. Downgrade to UNDERPERFORM with unchanged TP of RM1.40 based on unchanged 11x FY18E PER.

Within expectations. FY17 CNP of RM46.6m is within our/consensus forecasts accounting for 95%/101% of estimates, respectively. A 1.4 sen dividend was declared in 4Q17 bringing FY17 dividend to 2.4 sen within our 2.2 sen estimate.

Results highlight. FY17 CNP was down 17% YoY despite marginal revenue growth of 1% mainly due to lower construction PBT margins of 9% (-3ppt) as construction projects executed in FY17 (esp. Pan Borneo) have weaker margins vis-à-vis projects executed in FY16. 4Q17 CNP was up 33% QoQ on the back of a higher revenue (+33%) from its construction division as Pan Borneo project along with Kuching Wastewater plant, which makes up a huge portion of HSL’s order-book gradually picked up pace.

Outlook. For FY18/FY19, we are targeting replenishment of RM400m/RM400m for HSL as we believe they would be more focused on executing their current outstanding order-book of RM2.7b (visibility of three years) as major infrastructure projects such as Pan Borneo and Kuching Wastewater treatment plant move into more advanced stages. As for their property division, unbilled property sales stood at c.RM150.0m providing c.2.0-years’ visibility. For FY18, HSL plans to launch RM150m worth of property projects from Precinct Luxe, Vista Industrial Park, Samariang and Highfields. We note that construction for the new phases of Precinct Luxe has started (at c.50% completion) and billings can be recognised immediately upon launch.

Earnings estimates. Maintain our FY18E earnings and introduce FY19E earnings of RM78m based on FY18/FY19 replenishment target of RM400/RM400m.

Downgrade to UNDERPERFORM with an unchanged TP of RM1.40 based on FY18E PER of 11x. Our downgrade is premised on HSL’s exceptional YTD returns of 15% (vs. KLCON’s negative YTD returns of 1.3%) despite the lack of catalyst. Also, we deem their current trading valuations of 13.1x FY18E PER high as it is at the higher-end of our targeted small-to-mid cap PER range of 8-13x and HSL’s construction PBT margins moving forward is likely to remain subdued at below double-digit levels (unlike years prior to FY17 which was consistently above double-digit) as their current outstanding order-book which comprises of major infrastructure jobs have much weaker margins.

Risks to our call include higher-than-expected job wins, faster-than- expected construction progress and better-than-expected construction margins.

Source: Kenanga Research - 28 Feb 2018