News

Yesterday, HSL announced that its 75% owned Kumpulan Nishimatsu Hock Seng Lee has won the Kuching City Central Wastewater Management System (Phase 2) contract worth RM750m from the State Government of Sarawak.

The scope of works includes construction and commissioning of the wastewater treatment plant, main, secondary and tertiary lines, property connections, provision of process plant and equipment, related building works and M&E works. The contract period is 72 months with expected completion by March 2022.

Comments

We were not entirely surprised with the contract award as we had been anticipating this particular project. Nonetheless, we are still positive on the contract award, as its 75% share of the RM563m contract will increase its total contracts secured to date to RM630m, making up 63% of our RM1.0b FY16E target.

Assuming PBT margins of 10%, the contract is expected to contribute c.RM7.0m to the bottom-line per annum.

Outlook

In light of potential contracts from: (i) Pan Borneo and (ii) infra works within the SCORE area to be dished out in FY16, we increase our FY16E replenishment target by another RM500m to RM1.5b (previously RM1.0b) with a remaining replenishment assumption of RM870m to be achieved for the year.

Inclusive of the latest award, HSL’s outstanding orderbook now stands at RM1.2b (previously RM658m) providing visibility for the next c.2 years.

Change to Forecasts

We increase FY16-17E earnings by 8.3%-11.1% to RM93.3-99.2m on the back of a higher FY16E orderbook replenishment target of RM1.5b.

Rating

Maintain MARKET PERFORM

Valuation

We reiterate our MARKET PERFORM call with a higher TP of RM2.19 (previously RM2.03) based on 13.0x FY16E PER. We believe our valuations are justifiable given that the it traded at 14.0x PER valuation when the Pan Borneo news flow garnered investors’ interest in 2013.

HSL’s fundamentals are attractive with one of the highest margins in the construction space while its current outstanding orderbook provides earnings visibility for c.2 years.

Risks

Failure to meet new contracts assumption.

Higher-than-expected input costs.

Slower-than-expected construction works progress

Source: Kenanga Research - 18 Mar 2016