INVESTMENT HIGHLIGHTS

• Dismal 1QFY17 Earnings

• Earnings contracted from lower billings

• Trimmed earnings estimates

• Nonetheless, we reiterate our BUY stance with an adjusted TP of RM2.00

Dismal 1QFY17 Earnings. HSL’s 1QFY17 earnings of RM11.3m (- 30%YoY) registered an insipid result accounting for a dismal 7.6% and 15.2% of ours and Street’s estimates. Its 1QFY17 earnings reflects a decreasing revenue from lower progress billings from RM113.2m in 4QFY16 to RM105.1m in 1QFY17 (-7%YoY). Segmentally, current results incorporated soft and stagnated revenue profile for (i) construction; RM91.10m* (-0.4%YoY) and (ii) property; RM14.1m (-3.0%YoY). On the other hand, construction PBT (50.9% of TPBT*) rose +11.0%YoY while property PBT (31.3% of TPBT) expanded +103%YoY.

Earnings contracted by lower progress billings. The earnings contraction reflected are partly through lower progress billings and partly our optimistic forecasts. Even though, we estimated billings would rise in 2QFY17 onwards, it will not be sufficient still to meet our full year FYE17 forecasts. Earlier, we estimated that Kuching (Phase 2) and Miri Wastewater Treatment plants would be able to recognize 10.5% in 1Q17 and 10% in 2Q17 from the total RM863m from both projects. Now, we have learnt in our visit note to Sarawak (24.4.17) issues such as soil factor and municipal regulations impedes construction progress, subsequently lowering billings from its RM2.4bn orderbook. Hence, we adjusted our estimates opting for incremental recognition of 5%-10% quarterly instead of an exponential S-curve recognition.

Trimmed earnings estimate. Having said that, we trimmed our earnings assumptions for FYE17/FYE18 by 20% and FYE19 by 10% in tandem of the delays of billings recognition and reintroduce our estimates for FYE17-FYE19. We acknowledged that HSL may not be able to recognize its billings expeditiously as we have predicted due regulatory issues i.e. native land titles and engineering hurdles such as soil profiles. Recommendation. In line with trimmed estimates, we adjust our target price lower from RM2.19 per share to RM2.00 per share based on the changes in terminal value and time based on DCF (WACC: 8.0%). To balance our view; HSL has traded between 10x and 18x PER; thus at a price of RM2.00 the stock would still be trading at 14.0x FYE18 earnings, which is the median of KLCON’s small to midcap PER range. Our target price implies a potential +19.5% upside and currently its earnings yield is 6.08% with a positive spread of +2.33% against 5-Y MGS of 3.57%.

Source: MIDF Research - 26 May 2017