• Dull 6MFY17 results

• Earnings besetted by lower billings

• Maintain earnings expectation

• Nonetheless, we reaffirm our BUY stance with a TP of RM2.00.

Dull 6MFY17 Earnings. HSL’s 6MFY17 earnings of RM20.7m (-27%YoY) registered an insipid result accounting for a dismal 26.3% and 33.4% of ours and Street’s estimates. Its 6MFY17 earnings reflects a decreasing revenue from lower progress billings and costs from RM249.3m in 6MFY16 to RM211.5m in 6MFY17 (-15%YoY). HSL’s 6MFY17 results incorporated tepid revenue profiles for (i) construction; RM226.7m (+4.0%YoY) and (ii) property; RM30.8m (-4.0%YoY) which accounted for RM211.5m of revenue (-15.2%YoY) after excluding intersegment elimination of RM46.0m. Furthermore, construction PBT of RM17.8m (63.7% of TPBT*) decreased -32.0%YoY while property PBT of RM10.2m (36.5% of TPBT) contracted -10%YoY.

Earnings besetted by lower progress billings. Despite the doldrums in revenue and earnings, HSL is still in good shape from its total orderbook of RM2.4bn. (3.08x FYE17 revenue cover) Although, in our previous report (26.5.17) we have expected that current quarter would see revenue revival, the progress of Miri and Kuching projects remains challenging because of potential soil cavities and soil displacements from tunnelling through undulating sedimentary rocks, alluvial slopes and limestone terroir. Therefore, we surmise our earnings estimates outpaced HSL’s progress billings.

Maintain earnings expectations. Notably, the progress rate for the Miri Centralised Wastewater System (Package A: Trunk Sewer) and Kuching Centralised Sewerage System (Package 2) is just a mere 1.53% and 0.5% respectively. Hence, we expect that in FYE18/FYE19 HSL’s revenue will be better. Moreover, Miri Centralised Sewage Treatment Plant (Package B) beckons. To illustrate healthy prospects, HSL has declared its first interim dividend of 1 sen for FY17 implying management’s confidence from its future revenue growth and cash balance of RM68.8m (or 5.73x its current working capital of RM394.3m signalling robust operational efficiency). Consequently, we reiterate our earnings expectations in anticipation of higher progress billings in upcoming quarters which could normalize earning blips.

Recommendation. Nonetheless, we maintain our target price of RM2.00 per share based on DCF (WACC: 8.0%) implying a +29.0% upside.

Source: MIDF Research - 23 Aug 2017