Malaysia’s benchmark index retreated as profit-taking in key heavyweights weighed on sentiment, while overall market activity remained active. Summary FBM KLCI fell 0.83% to 1,684.93 , dragged by losses in banking and selected large-cap names, despite steady trading participation. Market Performance FBM KLCI : 1,684.93 (-0.83%) FBM Mid 70: -0.00% (flat) FBM Small Cap: -0.23% FBM ACE: +0.20% Broad market was mixed , with weakness concentrated in large caps. Market Breadth & Trading Activity Total volume: 3.54 billion shares Total value: RM4.19 billion Gainers: 456 Losers: 678 Unchanged: 550 Market breadth turned negative , reflecting cautious sentiment. Top Movers – KLCI Gainers Axiata (6888.MY) +1.54% Petronas Gas (6033.MY) +1.18% Sunway (5211.MY) +1.15% Losers Hong Leong Bank (5819.MY) -3.29% Maybank (1155.MY) -3.02% CIMB (1023.MY) -2.47% Banking sector weakness was the main ...
Retain BUY with target price (TP) of RM2.19
INVESTMENT HIGHLIGHTS
- Strong reassurance from visit to HSL in Sarawak
- Affordable housing and wastewater works will support earnings growth
- Reaffirm earnings estimates
- Maintain BUY with an adjusted TP of RM2.19
Strong reassurance from visit to HSL in Sarawak. We emerged from HSL’s Kuching Wastewater Treatment and La Promenade visit in Sarawak with reassurance on our revenue, target orderbook and earnings forecasts for FYE17/FYE18/FYE19
Key takeaways from visit:
Compelling underlying sewerage needs. HSL’s key competency in sewerage and wastewater engineering i.e. micro tunnelling and piping will anchor its future earnings prospect due to the strong need of efficient wastewater and sewerage connection in Kuching, Miri and Sibu from growing population. In a revised master plan in 2007, Sarawak Sewerage Department (SSD) has estimated that 3 Wastewater plants are needed to support the population in Kuching. In March 2016, HSL was awarded package 2 of the Kuching Wastewater Treatment Plant amounting to RM750m through its 75% joint venture with Nishimatsu Construction and recently in March, 2017 it clinched another award for Miri Wastewater Treatment Phase 1. Note that SSD has earmarked total of 4 phases of wastewater treatment plant in Miri amounting to RM3.3bn. Thus, we reckon that due to its key expertise in micro tunnelling and sewer piping HSL will stand to benefit.
Affordable housing will be a levelling factor. Secondly, we observe that affordable housing would be a levelling factor to even out earnings blips from progress billings and project recognition. We notice that HSL’s land banks are strategically located to be developed under the public housings such as Projek Perumahan Rakyat (PPR) and Projek Perumahan Penjawat Awam (PPA1M) such as in Muara Tebas and Muara Tuang. We estimate the comfortable level of GDV for affordable housing projects that HSL could undertake (based on its working capital) is c.RM170m. Last year, the state government has approved a total of 18,787 units of PR1MA houses to be constructed within the next 4 years. We are expecting HSL to take the opportunities in upcoming quarters.
Recommendation. We maintain our BUY recommendation with target price RM2.19 based on DCF method (WACC: 6.7%). We take cognizant that the previous results, HSL did not make the mark. We are convinced that earnings will make a comeback during the 2QFYE17-3QFYE17 as HSL would be able to recognize billings from Pan Borneo project. So far, anaemic earnings have subdued its share price advancement but due to its franchise in microtunneling, sewer piping and waste water engineering in Sarawak, HSL should be revisited.
Source: MIDF Research - 27 April 2017
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