HSL’s 2QFY16 came in weaker than expected at RM12.1m (-25.9% QoQ, -29.1% YoY). YTD, the Group registered RM28.3m (-22.7% YoY) which constituted only 33.4% and 34.0% of our and consensus full year estimates. This was against our earlier expectations that earnings should be stronger after a weak quarter in 1QFY16 due to stronger job replenishment of c.RM1.9bn new jobs. Accordingly, FY16-18 earnings were adjusted downward by 10.7%/4.5%/4.0% respectively to account for slower than expected revenue billings. As such, our TP is changed to RM2.15 (from RM2.25 previously), pegged at 12x FY17F EPS. Maintain Outperform and we still favor HSL for its healthy outstanding orderbook (c.RM2.3bn) and strong balance sheets. An interim dividend of 1 sen was proposed.

Construction business. As most of the Group’s jobs are still at early stages, HSL’s construction revenue and PBT in 2QFY16 dropped further to RM96.2m and RM12.9m or decreased 32% and 44% respectively. In addition, most of the jobs completed during the quarter had lower profit margins. In addition, progress claim of construction works was also slower due to the completion of certain major jobs while new jobs were still at preliminary stages.

Outstanding order book of RM2.3bn (from RM2.4bn previously). With no meaningful projects clinched in 2QFY16, the Group’s outstanding orderbook dipped marginally to RM2.3bn. To recap, its biggest job win to date is the Pan Borneo Highway package which has a contract sum of RM1.7bn (HSL’s stake is 70%), with contract period until late-2020. The other main job win is the Kuching Centralised Wastewater System that has a value of RM750m via its consortium of Kumpulan Nishimatsu Hock Seng Lee in which it holds a 75% stake. This job is expected to be completed by 2022. With current healthy outstanding orderbook, we believe earnings visibility for its construction business remains strong over the next 3-4 years.

Property Business. HSL launched some projects during the quarter and achieved an encouraging take up rates. We understand that the Group’s project i.e. The Vista Industrial Park (VIP) has seen over 50% of the first block of 56 industrial units sold. Elsewhere, sales at the latest phases of popular residential estate Samariang Aman 2 in Kuching’s north have also been well-received. Also, HSL has recently launched Precinct Luxe which offers premium super-link homes and could unveil unveil Phase 2 of La Promenade by end-2016. La Promenade is the Group’s gated and guarded development, located c.7km from the Kuching city center.

Source: PublicInvest Research - 19 Aug 2016