HSL has secured a road-works contract in Sibu worth RM104.5m. Neutral on the win as it is part of our orderbook replenishment of RM400.0m. No changes to FY19-20E earnings. Maintain our MARKET PERFORM call and unchanged Target Price of RM1.40 based on 10.0x FY20E PER.

Road works. Yesterday, HSL announced that they have bagged the construction work for Jalan Sg. Bidut/Kpg. Tutus/Kpg. Sebedil/Kpg.Bungan Kecil with a contract value of RM104.5m. The scope of works includes piling works, earth/sand filling, geotechnical work, drainage, and road pavement and is expected to commence in Sep-19 for 24 months.

Neutral on win. We are neutral on the win as it is part of our new replenishment assumptions of RM400.0m. To recap, HSL bagged a huge construction works contract for a bridge in Batang Paloh back in Apr 2019 amounting to RM298.9m and we are expecting more road work jobs in the future. Assuming pre-tax margin of 8%, we expect the project to contribute c.RM3.0m per annum to its bottom-line.

Outlook. We believe that the overall construction pace for its existing projects like Pan Borneo (c.45%), Miri and Kuching Waste Water are progressing smoothly at c.55% and 15%, respectively. As such, we anticipate higher construction billings in FY19 as its major on-going projects move into more mature stages. Its current outstanding order book stands at c.RM2.6b providing 3-year visibility.

Earnings unchanged. Post contract, there are no changes to our FY19-20E earnings as it is within our replenishment assumptions.

Maintain MARKET PERFORM with an unchanged Target Price of RM1.40 based on 10.0x FY20E PER. Our ascribed multiple of 10.0x implies a valuation close to its 10-year -0.5SD level 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 - 20 Aug 2019