FY19 CNP of RM55.2m (+3% YoY) fell short of expectations, accounting for 84%/91% of our/consensus estimates, mainly due to slower progress billings of construction works and marginally weaker property contributions. HSL plans to bid for the slew of infrastructure projects coming up in Sarawak to add to its existing unbilled order-book of RM2.2b. A direct Sarawak construction proxy, we are upgrading the stock to OUTPERFORM with a higher SoP derived target price of RM1.77 (implied P/E of 15x on FY20 earnings).

Missed expectations. FY19 CNP of RM55.2m (+3% YoY) is weaker than-expected, representing 84%/91% of our/consensus estimates. This could be mainly due to: (i) timing delays in recognition of construction works and marginal dip in margins. Consequently, the construction segment posted pretax profit of RM46.6m (+7%) and margin of 7.9% (versus 8.3% in FY18), and (ii) a drop in property earnings, which came in at RM27.9m (-5%) on the back of revenue of RM92.3m (+10%).

Results’ highlight. 4QFY19 CNP came in at RM10.1m (-31% QoQ and -12% YoY) as pretax profit contributions from construction (of RM7.7m) and property development (of RM6.1m) were down QoQ. The company has declared a final DPS of 1.4 sen, taking full-year dividends to 2.4 sen (which translates to dividend yield of 1.9%). Balance sheet strength remains strong with net cash of RM81.3m (or approximately 15.0 sen per share) as of end-Dec 2019.

Outlook. Unbilled construction order-book currently stands at RM2.2b (or 3.7 times of last year’s construction revenue). There will be opportunities for HSL to win more construction jobs as the Sarawak state plans to award sizeable infrastructure projects on road and water works going forward. Interestingly, perhaps reflecting management’s business confidence, in the press statement released in conjunction with the results announcement, HSL has mentioned it plans to retain some capital in anticipation of major new project procurement going forward. We have pencilled in new contract wins of RM800m this year.

Earnings revisions. Post results, we have revised FY20E earnings to RM65m (-17%) and introduce FY21E earnings at RM79m as we tweak our assumptions on the timing of income recognition for its construction works and margins.

Upgrade to OUTPERFORM with a higher Target Price of RM1.77. Our TP – which is derived from SoP-valuation method (see table overleaf) – implies an underlying FY20E P/E multiple of 15x. The stock – which is currently trading near its eight-year low – is a proxy to the rising construction activities in Sarawak, offering potential total returns of 40%.

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

Source: Kenanga Research - 28 Feb 2020