HSL ... Sep10

By JF Apex Securities Berhad Research:-

HSL posted a strong first half result with revenue up by 27.3% y-o-y to RM 203.66mil, mainly attributed
to a 27.5% rise in construction revenue. 1HFY10 net profit came in at RM 31.52mil (+35.7% y-o-y),
making up 44.5% of our full year forecast while a better 2HFY10 is expected. On a quarterly basis,
2QFY10 revenue expanded by 20.4% q-o-q (+35.5% y-o-y) while net profit grew by 32.8%q-o-q
(+40.5% y-o-y). An interim dividend of 6% or 1.2 sen was declared. We maintain our Buy call on HSL
with an unchanged target price of RM 1.90 per share.

Within Estimates – Revenue grew 27.3% Overall, HSL’s 1HFY10 performance was within our expectation. 1HFY10 revenue grew by 27.3% y-o-y to RM 203.66mil compared with that of RM 159.98mil in 1HFY09,
mainly attributed to a 27.5% rise in construction revenue as the construction segment accounted for 91% of the group’s revenue.

Better margins – Net profit expanded by 35.7% Meanwhile, its 1HFY10 net profit came in at RM 31.52mil
(+35.7% y-o-y), making up 44.5% of our full year forecast. The increase was mainly driven by: i) an increase in construction activities ii) better margins achieved during the period under review as 1HFY10 net profit margin stood at 15.4% vs 14.5% a year ago. On a yearly basis, 2QFY10 revenue grew by 35.5% y-o-y to RM 111.26mil while net profit grew by 40.5% y-o-y to RM 17.98mil.

Q-o-Q – Broadly in Line
On a quarterly basis, 2QFY10 revenue expanded by 20.4% q-o-q while net profit grew by 32.8%q-o-q as the level of construction activities in 1QFY10 was lower, mainly due to the rainy season.

A better 2H
Looking forward, a better 2HFY10 can be expected on the back of HSL’s RM 1.85bil order book(of which RM 1.14bil is still outstanding) and a strong order book replenishment ability (RM 350mil to RM 500mil p.a). According to its press release, there has been a rise in infrastructure contracts, particularly access roads to the proposed hydro-dams under the SCORE programme. The group has tendered for several access roads to the hydro-dams under the SCORE programme. The value of HSL’s tender bids for infrastructure contracts in the last 2 months is approximately RM 700mil and the group expects to hear outcomes in late 2010. To recap, the total value of projects procured so far in FY2010 is RM 262million.

Dividend
A first interim dividend of 6% or 1.2 sen per share was declared for the current quarter.

Investment Risks
Major risk factors include:
- Delay, review or cancellation of projects;
- Rising material prices that will put additional strain on margins

Valuation and recommendation
Maintain Buy with a TP of RM 1.90 Our target price for HSL is maintained at RM1.90 per share,
which is based on forecasted FY11 EPS of 15.9 sen and a PER of 12x (previously 11x), underpinned by greater infrastructure spending in Sarawak on the back of the upcoming state election and the SCORE programme. We favour HSL due to its healthy order book, strong balance sheet, leading presence in the state and steady earnings performance.