We deem 1Q18 CNP of RM13.8m (20%/19% of our/consensus forecasts) as within expectation on anticipation of stronger billings from three major infrastructure projects HSL is currently working on for the remaining quarters. Hence, no change to earnings estimates. Maintain MARKET PERFORM with an unchanged TP of RM1.40 as backed by healthy order-book of RM2.5b and improving earnings.

Deemed within expectations. 1Q18 CNP of RM13.8m accounted for 20%/19% of our/consensus forecasts which we deem as broadly within as we are anticipating further pick-up in billings for major infrastructure projects HSL is currently involved in i.e. Pan Borneo, Kuching and Miri Waste Water plant. No dividends declared as expected.

Results highlight. 1Q18 CNP of RM13.8m was marginally down by 6% QoQ mainly due to a weaker revenue (-22%) from seasonally weaker construction activities as there is a typical year-end push in construction works i.e. 4Q17. 1Q18 CNP improved 23% YoY on the back of a higher revenue (+39%) as construction progress of major projects at hand, i.e. Pan Borneo, Miri Waste water and Kuching Waste water plant picked up faster pace. We note that Kuching Wastewater plant only kick-started construction in 4Q17 despite being awarded in FY16 as HSL were ironing out details with the clients.

Focusing on execution. Moving forward, we believe HSL would be more focused on executing their outstanding order-book of RM2.5b (3- year visibility) as major infrastructure projects at hand move into more advanced stages. Despite not securing any contracts YTD, we maintain our FY18-19E replenishment forecasts of RM400m for now as HSL continues to tender for state-linked infrastructure projects with contract value range of RM50-100m. Current progress for Pan Borneo (25% completed), Miri Wastewater (15% completed) and Kuching Wastewater (5% completed) are progressing well within the stipulated timeline. As for their property division, unbilled property sales stood at c.RM120.0m providing c.2 years’ visibility. For FY18, HSL plans to launch a total of RM150m (YTD launched RM50m) 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 unchanged. No change to our earnings estimates post results. On earnings sensitivity, should we cut our FY18-19E replenishment targets from RM400m to RM200m given slower-thanexpected contracts, FY18-19E CNP would be down by 3-6% - which is still negligible, in our view.

Maintain MARKET PERFORM with an unchanged TP of RM1.40 as we (i) roll forward valuations to FY19E while (ii) lowering Fwd. PER valuation from 11x to 10x. Our valuations de-rating is a broad-based de-rating for all construction counters under our coverage as there are sector uncertainties from the new government and we are anticipating a lull in construction awards in the near-term. As HSL is currently trading at -1.5SD@historical 5-year PER level which also translates to a 5-year low, we think our MP call is fair as further downside is less likely given their robust track records and project execution capabilities in Sarawak.

Risks to our call include lower-than-expected job wins, delay in construction progress and lower-than-expected construction margins.

Source: Kenanga Research - 25 May 2018