HSL has bagged a RM101.2m contract for the construction of a Maktab Rendah Sains Mara college in Bintulu, Sarawak from Petronas. NEUTRAL on the win as YTD replenishment is still within our FY18E target. Hence, no change to FY18- 19E earnings. Maintain MARKET PERFORM with an unchanged TP of RM1.40 based on 10.0x FY19E PER.

News. HSL announced that they have bagged a contract worth RM101.2m from Petroliam Nasional Berhad (Petronas) for the project in Bintulu. The scope of works includes pilling, earth works, infrastructure works (including retaining structures), building works for academic purposes, administration, student hostels and related amenities as well as the associated mechanical and electrical works over 36 months.

Neutral on win. This is the first contract award for HSL, and we are NEUTRAL on the win as its YTD contract replenishment of RM101.2m represents 25% of our FY18E targeted replenishment of RM400.0m. Assuming pre-tax margins of 10%, the project is expected to contribute c.RM2.5m to its bottom-line per annum.

Outlook. The contract brings its outstanding order-book to c.RM2.6b (previously, RM2.5b) providing 3-year visibility. We believe they would be focused on executing their on-going projects, i.e. Pan Borneo, Miri Wastewater, and Kuching Wastewater, which are moving into more advanced stages. For now, 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. In its 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. Post contract award, we make no changes to our FY18-19E earnings.

Maintain MARKET PERFORM with an unchanged TP of RM1.40 based on 10.0x FY19E PER. To recap, we downgraded our applied multiple from 11.0x to 10.0x previously due to a broad-based de-rating for all construction counters under our coverage. Nonetheless, 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 record 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 - 15 Aug 2018