2QFY20 CNP of RM4m (-48% QoQ) brought 1HFY20 CNP to RM11.5m (-62% YoY), broadly within our/consensus (39%/32%) forecasts as we anticipate stronger work progress post MCO. Maintain OP and TP of RM1.25 as we anticipate market attention to gradually shift towards brighter catalysts such as: (i) earnings rebound in FY21, and (ii) potential goodies from the upcoming Sarawak elections, Budget 2021, and 12th Malaysian Plan.

Broadly within. 1HFY20 CNP of RM11.5m which accounted for 39%/32% of ours/consensus estimates is deemed broadly within as we anticipate 2HFY20 to come in stronger as construction activities pick up post MCO and CMCO (March 18th – June 9th 2020). No dividends declared as expected.

QoQ, 2QFY20 CNP of RM4m was lower by 48%, led by a 26% decline in revenue from slower works in both its construction and property segments stemming from the longer MCO period of 2 months’ vs 2 weeks in the previous quarter. Accordingly, CNP margin was squeezed by 2ppt from fixed cost on the back of lower revenue. YoY, 1HFY20 CNP was lower by 62% mainly from the MCO lockdown nationwide.

Operating levels improved but still not normalised. HSL gradually started construction in late May albeit at very interrupted levels. Since then, construction operations have ramped up to 60% utilisation vs 30- 40% during the MCO and CMCO periods. Management remains cautious on activities picking up towards pre-Covid levels 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. Management concurs with our view that more awards will be rolled out in 2H.

Earnings forecasts unchanged post 2QFY20 results.

Maintain OUTPERFORM with an unchanged TP of RM1.25 based on 11x FY21E PER (-0.5 SD to 3-year mean). While we acknowledged 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), market focus would then shift toward expectation of earnings rebound in FY21 and potential goodies from Budget 2021, upcoming Sarawak elections and the 12th Malaysian Plan, spurring a rally for contractors.

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

Source: Kenanga Research - 7 Aug 2020