Despite its 1QFY20 results coming in below expectations, we keep our OUTPERFORM call with unchanged TP of RM1.25 as the lacklustre quarter was due to the unprecedented Covid-19 crisis with the dire outcome wellexpected by the market. We anticipate market attention to gradually shift towards brighter prospects such as: (i) earnings rebound in FY21, and (ii) potential goodies from the upcoming Sarawak elections, Budget 2021, and 12th Malaysian Plan.

Below expectation. Despite already adjusting our earnings lower in our sector report released early June to account for the MCO impact, CNP still came in below at 16% of our estimate (13% of consensus) due to the worse-than-expected MCO effect. No dividends declared as expected.

QoQ, 1QFY20 CNP was lower by 26%, led by a 40% decline in revenue from slower works in both its construction and property segments stemming from the MCO which lasted two weeks. YoY, CNP was lower by 46% on the same reasons.

Still at snail pace. Currently, construction operations are still slow at 30-40% utilisation as of June. Management remains cautious about activities picking up in the near horizon due to labour shortage issues and the strict compliance of safety precaution at work sites.

Current order-book remains healthy at RM2.2b providing visibility for the next 3 years. YTD, HSL has yet to secure any contracts, against our replenishment expectation of RM500m. Nonetheless, we are keeping our target unchanged for now backed by tenders for the Sarawak coastal road, trunk roads and the water works projects which could be rolled out in 2HCY20.

For 2QFY20, with the absence of revenue for almost two whole months coupled with running fixed costs during the peak of MCO, we expect HSL to dip into losses before gradually recovering in 2HFY20.

Lower FY20E earnings but keep FY21E unchanged. Post results, we adjust our FY20E earnings down by 36% after imputing lower construction margins and slower pick-up in work progress.

Maintain OUTPERFORM with an unchanged TP of RM1.25 based on 11x FY21E PER (-0.5 SD to 3 year mean). While we acknowledge that the MCO had hit contractors like HSL hard, we are of the view that once the worst of the results season passes over (in late August post 2QCY20 results), market’s focus would then shift toward the earnings rebound in FY21 and the potential goodies from Budget 2021, upcoming Sarawak elections and the 12th Malaysian Plan which would spur a rally for contractors.

Risks to our call include: Resurgence of Covid-19 cases, snap elections at the federal level.

Source: Kenanga Research - 19 Jun 2020