Hock Seng Lee - Results in line; cash and share dividend surprise on the upside BUY

We maintain BUY on Hock Seng Lee (HSL), with an upward revised sum-of-parts-derived fair value of RM2.65/share (vs. RM2.44/share previously), which includes a PE of 9x against its 3-year average forward earnings for its construction division.

We have rolled forward our valuation years to FY12-FY14. HSL’s net profit of RM87mil for Y11 (+19% YoY) came in within expectations – at a mere 1ppt above our forecast and 1ppt below consensus. We introduce FY14F net profit at RM137mil (+10% YoY).

No major surprises could be gleaned from the full-year results, except for a higher-than-expected dividend as well  as an earlier-than-expected distribution of treasury shares. 

It proposed a final dividend of 1.8 sen/share and a special dividend of 0.6 sen/share, bringing the total for the full year to 3.6 sen/share, vs. 3 sen/share (excluding treasury distribution) for FY10. We had expected dividend to be maintained at 3 sen/share.

With the latest dividend, the net payout ratio is maintained at 17% as it was the previous year. We now assume a 17% net payout ratio for FY12F-FY14F, translating into an annual GDPS of between 4.4 sen and 5.6 sen, or yields of 2.7%-3.4% at the current price.

For the share dividend, it will distribute one treasury share for every 50 shares held (totalling nearly 11mil treasury shares) – equivalent to 3.2 sen/share at RM1.60/share. This would be the second time in as many years that HSL is distributing its treasury shares, with the first in FY10 of the same ratio. After the latest distribution, over 24mil shares would remain in treasury. The share dividend’s ex- and entitlement dates have been fixed for 26 and 28 March 2012, respectively.

HSL maintained its growth momentum in 4QFY11, with a net profit of RM26mil (+21% YoY; +16% QoQ). Crucially, operating margin of the construction division was maintained at above 20% for 4QFY11 and the full year, while better margins also aided the property division in view of fewer launches and sales. 

HSL currently has RM1.7-RM1.8bilbil worth of jobs in hand, of which RM1.1bil is outstanding – with plenty more projects within Sarawak’s SCORE up for grabs. 

 It is actively seeking opportunities in the power sector and it may soon secure a RM250mil education facility in Mukah. The remaining phases (worth RM1.7bil) of the Kuching central sewerage project are also up for grabs this year, with the RM452mil phase one currently being carried out by HSL. HSL remains as one of the primary proxies to the rapid  pace of development taking shape in Sarawak. 

Source: AmeSecurities