INVESTMENT HIGHLIGHTS

• Results came in mixed

• Earnings imbued by lower than expected progress billings

• FYE18/FYE19 earnings trimmed to absorb ‘hard landing’

• Nonetheless, we reiterate our BUY stance with a TP of RM1.67 per share

3MFY18 Earnings mixed results. HSL’s 3MFY18 earnings of RM13.7m (+22.3%YoY) registered a mixed result accounting for a 16.2% and 22.0% of ours and Street’s estimates. Its 3MFY18 earnings reveal increased revenue from higher progress billings from RM94.9m in 3MFY17 to RM131.7m in 3MFY18 (+39%YoY). The deviation in expectation occurred as we’ve predicted that HSL would register higher progress billings rate.

Earnings imbued by lower than expected progress billings. HSL’s total current orderbook amounts to RM2.9bn. (3.7x FYE18 revenue cover) as such we expect that upcoming quarters would see revenue revived. On the contrary, the progress of Miri and Kuching waste water projects are rather sluggish currently. This is coupled with Pan Borneo’s total project review by the federal government. As a result, HSL’s orderbook replenishment target for FYE18 would be potentially reduced.

FYE18/FY19 earnings forecasts cut to absorb ‘hard landing’. However, this scenario prompts an adjustment to HSL’s earnings assumption for FYE18/FYE19. We reduced our assumptions by 20% (from RM767.0m to RM613.6m) for revenue and 25% (from RM84.4m to RM63.3m) for earnings in FYE18. Meanwhile, for FYE19 we reduce our target by 20% (from RM710m to RM568m) and earnings by 21% (from RM81.7 to RM65.6m).Our adjustment is to comfort any ‘hard landings’ from lower progress billings and any adverse announcements material to its orderbook or billings progress.

Recommendation. Therefore we maintain our BUY recommendation with an adjusted target price of RM1.66 per share rolling over FYE19’s EPS of 11.9sen to our mid-range PER of construction sector target of 14x.

Source: MIDF Research - 25 May 2018