3QFY20 CNP of RM10.9m (+1.75x QoQ, -25% YoY) lifted 9MFY20 to RM22.4m – within our, but below consensus, estimate. Given lower-than-expected YTD replenishment of RM101m, we reduce FY20E target to RM150m (from RM500m) but increase FY21E replenishment to RM750m (from RM500m) as we expect awards to be back loaded. FY20E/FY21E earnings lowered by 2%/4% post revision. Keep OP on lowered TP of RM1.20 (from RM1.25).

Within our but below consensus forecasts. 3QFY20 CNP ofRM10.9m (+1.75x QoQ, -25% YoY) lifted 9MFY20 to RM22.4m,accounting for 77%/68% of our/consensus full-year expectations. Wedeem the results to be within our forecast but below consensus as theirimplied 4QFY20 profit projection of RM11m (vs ours of RM7m) is a tadbullish given the reintroduction of CMCO in Kuching from 9th – 27thNovember which would impede productivity and subsequently revenuebillings and margins. No dividends as expected.

QoQ, 3QFY20 CNP of RM10.9m is up 1.75x led by a 96% increase inrevenue as construction and property-related activities rebounded fromthe MCO-laden 2QFY20. YoY, 1HFY20 CNP was lower by 50%, mainlyfrom the MCO lockdowns nationwide.

Operations impacted by the various MCOs. HSL gradually startedconstruction in late May albeit with much interruptions. Activity wasgradually picking up but was again interrupted by the rise in Covid-19cases in October 2020 which led to various targeted EMCOs andCMCOs being imposed nationwide. These directly and indirectlyaffected operations by: (i) impeding productivity at sites through SOPcompliance, (ii) travel restrictions delaying works as HSL relies onspecialist sub-contractors from Peninsular for certain requirements, and (iii) labour shortage issues.

Lower-than-expected YTD replenishments of RM101 (as of Nov2020) against our RM500m target in FY20 prompt us to revise ourtarget lower to RM150m. That said, we increase our FY21Ereplenishment target to RM750m (from RM500m) as we believedeferred tenders in FY20 arising from the Covid-19 pandemic would bedished out next year as Sarawak pivots towards a recovery. Amongstthese tenders are the Sarawak coastal road, trunk roads and waterworks projects. Current order-book remains healthy at RM2.0bproviding visibility for the next three years.

Post revision in replenishment targets, our FY20E/FY21E forecast are lowered by 2% and 4%, respectively.

Maintain OUTPERFORM with a lower TP of RM1.20 (from RM1.25) based on unchanged 11x FY21E PER (-0.5 SD to 3-year mean). Whilewe acknowledged that the MCO had hit contractors like HSL hard, we believe the worst is behind us and focus will eventually pivot towards: (i)earnings rebound in FY21, and (ii) optimism arising from the upcoming Sarawak elections and 12th Malaysian Plan.

Source: Kenanga Research - 27 Nov 2020