HSL secured the Batang Paloh Bridge job worth RM298.9m, providing YTD total replenished contract value of RM380.2m or 95% of our full-year assumption. Positive win while they could also exceed our previous FY19E replenishment target of RM400.0m (which is upgraded by another RM400m to RM800m). As such, we raised FY19-20E earnings by 3-7% and upgrade our call to MP (from UP) with higher TP of RM1.40 (from RM1.25) based on 10.0x FY20E PER.

Third job win. Yesterday, HSL announced that they have bagged the construction work contract for Batang Paloh Bridge in Mukah, Sarawak for a total consideration of RM298.9m. Construction is expected to start in May 2019 for 48 months. This bridge package falls under Package 3 of the RM11.0b allocation for the state’s coastal road upgrade program.

Positive on win. We are positive on the win because its YTD replenishment total value of RM380.2m makes up a hefty 95% of our FY19E targeted replenishment of RM400.0m. We opine that they stand a good chance to exceed our target, underpinned by the slew of infrastructure projects rolled out by the Sarawak government. Assuming pre-tax margin of 8%, we expect the project to contribute c.RM4.5m per annum to its bottom-line.

Outlook. We believe that the construction works for its existing projects, namely Pan Borneo, Miri and Kuching Waste Water, are coming on 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). HSL’s current outstanding order-book stands at c.RM2.5b providing 3-year visibility.

Earnings upgrade. Post contract, we raised our FY19-20E earnings by 3-7% after factoring in another RM400.0m worth of order-book replenishment into our FY19E assumptions.

Upgrade to MARKET PERFORM (from UP) with higher Target Price of RM1.40 based on 10.0x FY20E PER due to the encouraging pace of order-book replenishment. Previously, we had an UNDERPERFORM call with a Target Price of RM1.25 that is based on FY19E PER. Our ascribed multiple of 10.0x implies a valuation close to its 10-year - 0.5SD levels at the higher-end of the ascribed 6-11x PER valuation range of contractors under our coverage.

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

Source: Kenanga Research - 18 Apr 2019