1H18 CNP of RM27.9m (40%/43% of our/consensus forecasts) came in below expectations due to lower-than- expected billings. 1.0 sen dividend declared as expected. Lowered FY18E and 19E CNP by 12% and 8%, respectively. Downgrade to UNDERPERFORM with a lower TP of RM1.30 (previously, MARKET PERFORM, TP: RM1.40) due to the revision in earnings.

Below expectations. 1H18 CNP of RM27.9m accounted for 40%/43% of our/consensus forecasts, which came in below our expectations. We believe the disappointment in earnings is due to slower-than-expected billings for its major infrastructure projects. 1.0 sen dividend declared as expected.

Results highlight. 1H18 CNP of RM27.9m grew 33%, YoY, backed by strong revenue growth of 67% mainly driven by its construction division. Its construction revenue grew by 81% as the construction progress for its major on-going projects, i.e. Pan Borneo, Miri and Kuching Waste water plant have picked up pace. That aside, its property division also registered steady revenue growth of 7% backed by on-going projects which we believe are projects like Precint Luxe. QoQ, 2Q18 CNP improved by 11% driven by several factors; (i) construction revenue growth of 21%, (ii) improvement in property development margin by 5ppt to 36%, and (iii) lower effective tax rate of 24% vis-à-vis 26% in 1Q18.

Execution remains essential. While we believe that HSL would be able to secure more new contracts for the year to boost its outstanding order-book, we believe that the focus for HSL remains in the execution of its outstanding order-book of c.RM2.6b (Pan Borneo, Miri and Kuching Waste Water) as their on-going major infrastructure projects are moving into more advanced stages.

Lowers earnings estimate. Post results, we reduced our FY18E and FY19E earnings by 12% and 8%, respectively, after we lowered our billings assumption from both of its construction and property development division. That said, we also took the opportunity to reduce our FY18E target replenishment from RM400.0m to RM200.0m.

Downgrade to UNDERPERFORM with a lower TP of RM1.30. The downgrade in TP is mainly due to the reduction in earnings as we maintained our FY19E PER of 10.0x, which is close to its 5-year -1.5SD levels. While we like HSL for its strong presence in Sarawak and improving earnings as construction progress for its three major projects have picked up, we believe that they need to strive harder in speeding up with the construction works which could potentially lead to upward revision in earnings.

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

Source: Kenanga Research - 17 Aug 2018