HSL has secured two contracts for a coal-fired power plant project in Mukah, Sarawak with a combined value of RM54.3m from Sarawak Energy Berhad. NEUTRAL on the win as YTD replenishment is still within our FY19E target. No changes to earnings. Downgrade to UNDERPERFORM (from MARKET PERFORM) with an unchanged TP of RM1.30 based on 10.0x FY19E PER.

Second job win. Yesterday, HSL announced that they have bagged two contracts with a combined value of RM54.3m from Sarawak Energy Berhad for a coal-fired power plant project in Mukah, Sarawak. The scope of works includes piling, earth works, infrastructure works, building works for staff accommodation and related amenities as well as the associated mechanical and electrical works which will span over 18 months. This represents HSL’s second job win of the year and is the second win of which the contract duration spans over 18 months.

Neutral on win. We remain NEUTRAL on the win as it falls within our FY19E replenishment assumption of RM400.0m. YTD, HSL’s contract replenishment amounts to RM81.3m representing 20% of our FY19E targeted replenishment of RM400.0m. Assuming pre-tax margin of 14%, we expect the project to contribute c.RM5.7m to the bottom-line.

Outlook. We believe that the construction work for its existing projects like Pan Borneo, Miri and Kuching Waste Water is progressing smoothly at c.40% and c.30% progress, respectively. On the other hand, we reckon that HSL is still in the process of tendering for major infrastructure jobs in Sarawak (e.g.: Sarawak Coastal Road, Second Link Road and Sarawak State Water Grid). As such, we maintain our FY19E replenishment target of RM400.0m for now, pending further developments. HSL’s current outstanding order-book stands at c.RM2.5b providing 3-year visibility.

No changes to earnings. Post contract, we make no changes to our FY18-19E earnings estimate.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with an unchanged TP of RM1.30 based on 10.0x FY19E PER. We base our TP on FY19E PER of 10.0x which is close to its 5-year -1.5SD levels, at the higher-end of the ascribed 6-11x PER valuation range of small-mid cap contractors. We believe the recent rally in share price since mid-Jan (c.10%) is mainly sentiment-driven given that tenders for major infrastructure projects are still in early stages. Amidst intensifying competition, we prefer to wait for more concrete developments and hence, believe our downgrade is fair.

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

Source: Kenanga Research - 12 Feb 2019