1QFY21 CNP of RM9.1m (-6% QoQ, +20% YoY) disappointed expectations due to weaker-than-expected property margins. In view of the high Covid-19 cases nationwide and elevated construction input costs, we dial back our optimistic FY21E replenishment target to RM500m (from RM750m) and trim our initial margin assumptions. Consequently, FY21E/FY22E earnings are cut by 24%/6%. That said, we maintain HSL at OP on unchanged TP of RM1.20 after rolling valuation base year forward.

Below expectations. 1QFY21 CNP of RM9.1m (-6% QoQ; +20% YoY) came below our and consensus expectations accounting for 16% of full year estimates due to weaker-than-expected property margins, likely from weaker product mix. That said, 1QFY21 property sales of RM17m are in line with our sales target of RM60m. No dividends as expected.

QoQ, 1QFY21 CNP of RM9.1m came off 6% mainly due to lower revenue registered at both construction (-10%) and property (-25%) segments due to seasonality. YoY, 1QFY21 CNP improved 20% rebounding from a low base in 1QFY20 which was affected by the first MCO lockdown involving two weeks of total work stoppage.

Not as rosy as we had earlier thought. With rising Covid-19 cases nationwide, we believe federal funded jobs would likely be pushed back – prompting us to reduce our earlier FY21E replenishment target of RM750m to RM500m. YTD, HSL has replenished RM200m worth of projects with outstanding order-book of RM1.8b providing visibility for the next three years.

Meanwhile, management has guided that the elevated steel prices coupled with labour shortages will likely suppress margins in the immediate term.

Earnings cut. Post 1QFY21 results, we cut FY21/22E earnings by 24%/6% to factor in (i) lower FY21 replenishment of RM500m and (ii) weaker margins at both its construction and property divisions.

Despite the earnings cut, we maintain OUTPERFORM with an unchanged TP of RM1.20 after rolling our valuation base year forward to FY22 on unchanged 12x PER (-0.5 SD to 3-year mean).

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

Source: Kenanga Research - 21 May 2021