HSL’s  9M14  results  missed  expectations.  We  reduce  our  FY14-15 forecasts by 16%/8% respectively and TP by 8% to MYR1.89 (implying a 3%  upside),  but  maintain  our  NEUTRAL  call.  HSL  is  a  good  proxy  to infrastructure spending in Sarawak, backed by the Sarawak Corridor of Renewable  Energy  (SCORE),  urbanisation  and  rural  development. However, we believe this has largely been priced in by the market.

A subdued 9M14. HSL’s 9M14 net profit missed expectations, reaching only  59%/62%  of  our  full-year  forecast/consensus  estimates respectively. The variance against our forecast came largely from lower-than-expected construction billings and property sales.   

Kuching  Phase  2  sewerage  project  in  FY15.  We  believe  HSL’s long wait  for  Phase  2  of  the  Kuching  Centralised  Sewerage  System  project (worth about MYR800m based on our estimate) will be over in FY15. We understand from sources that the contract award will happen “soon”. Given its dominant position in Sarawak’s construction sector, HSL is also well  positioned  to  garner  a  slice  of  the  action  in  the  MYR27bn  Pan-Borneo  Highway.  At  present,  its  outstanding  construction  orderbook stands at MYR1.1bn, which will keep it busy for the next two years.

Forecasts.  We  reduce  our  FY14-15  earnings  forecasts  by  16%/8% respectively to factor in lower construction billings and property sales.   Risks:  i)  contract  wins  in  FY14-16  falling  short  of  our  assumption  of MYR600m per annum and ii) an escalation in input costs.

Maintain NEUTRAL. The construction sector in East Malaysia is buoyed by  infrastructure  works  from  three  main  initiatives,  namely:  i)  SCORE (roads,  water  supply  and  port),  ii)  urbanisation  (flood  mitigation,  waste management  and  traffic  diversion),  and  iii)  rural  development  (roads, water  supply  and  housing).  We  also  like  HSL  for:  i)  its  sustained  high margins  given  limited  competition  from  only  a  small  pool  of  Sarawak state-registered (UPK) contractors for most public jobs in  Sarawak, and ii)  its  strong  balance  sheet  with  a  net  cash  of  MYR129.3m  or  22 sen/share as at 30 Sep 2014. However, we believe this has largely been priced  in  by  the  market.  We  cut  our  TP  by  8%  to  MYR1.89  (from MYR2.06) based on 12x revised FY15F EPS, in line with our  10-16x 1-year forward target P/Es for the construction sector.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Hock Seng Lee is a Sarawak-based construction company. It is also engaged in property development in Sarawak.

Recommendation Chart

Source: RHB