9M18 CNP of RM42.3m came broadly within, accounting for 69/67% of our/consensus forecasts. No dividends declared as expected. No changes to FY18-19E earnings. Upgrade to MARKET PERFORM (from UP) with an unchanged TP of RM1.30 based on FY19E PER OF 10.0x.

Broadly within. 9M18 CNP of RM42.3m accounted for 69%/67% of our/consensus forecasts which we deem to be broadly within our/consensus expectations as we are expecting a stronger fourth quarter performance. No dividends declared, as expected.

Results highlight. 9M18 CNP of RM42.3m grew 33%, YoY, backed by strong revenue growth of 67%, mainly driven by its construction division. Its construction revenue grew by 38% as the construction progress for its major on-going projects, i.e. Pan Borneo, Miri and Kuching Waste water plant picked up pace. While its property revenue was down by 4%, the division still recorded 6% growth in pre-tax profit due to improvements in margin as its pre-tax margin increased by 3ppt to 36% backed by its on-going projects which we believe to be projects like Precint Luxe. QoQ, 3Q18 CNP saw a marginal decline by 2% albeit 12% improvement in revenue. This is mainly due to the margin compression from its construction division, which saw its pre-tax margin declining by 3ppt to 7%, coupled with the higher effective tax rate of 26% (+2ppt).

Execution on track. Judging from its recent performance, we believe that the construction progress for its existing projects like Pan Borneo, Miri and Kuching Waste Water is progressing smoothly at c.35% and c.30% progress, respectively, should there be no Black Swan events that would jeopardise the execution of its outstanding order-book of RM2.4b.

Earning unchanged. Post results, there are no changes to our FY18- 19E earnings.

Upgrade to MARKET PERFORM with an unchanged TP of RM1.30. We upgrade HSL to MARKET PERFORM (from UP) which we believe is fair, given the drop in share price since late-August (-8%). We base our TP on FY19E PER of 10.0x which is close to its 5-year -1.5SD level, at the higher end of the ascribed 6-11x PER valuation range of small-mid cap contractors. While we like HSL for its strong presence in Sarawak and its improving earnings as construction progress for its 3- major projects have picked up, we believe they need to strive harder in speeding up the construction works which could potentially lead to upward revision in earnings in the future.

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

Source: Kenanga Research - 30 Nov 2018