HSL (FV RM1.99 - BUY) FY11 Results Review: Within Expectations

Hock Seng Lee’s (HSL) FY11 earnings of RM87.3m were within our expectations and consensus forecast, at 102.0% and 100.7% of the full-year estimates respectively. It declared a special DPS of 0.6 sen on top of a  final DPS of 1.8 sen, bringing its FY11 DPS to 3.6 sen. The group also declared a 1-for-50 distribution of treasury shares, which stood at 35.3m as of Jan 2012. Our positive stance remains as we see a burgeoning news flow from the SCORE region in the run-up to national polls. Hence, we maintain our BUY, at a marginally lower FV of RM1.99, based on an unchanged 12x FY12 PER. 

Within estimates.  HSL posted  FY11 revenue  of RM581.5m (+19.1% y-o-y), led by its construction division, for which revenue grew  22.2%, but this was partly mitigated by a lower contribution from its property segment, which saw revenue drop 28% y-o-y to RM22.0m due to the timing in the launch of new projects. EBIT, however, improved by a more moderate 17.0% y-o-y as the increase in operating expenses, which we attribute to escalating building material prices, eroded margins. All in, its core earnings rose 18.8% to RM87.3m on higher finance income and a marginal drop in its effective tax rate. On a quarterly basis, there were improvements across the board, with 4QFY11 revenue and core earnings coming in at RM158.6m and RM26.1m respectively.

Dividend surprise. The company declared a special DPS of 0.6 sen on top of a final DPS of 1.8 sen, bringing its  FY11 DPS to 3.6 sen. This implies a payout ratio of 21.7%, the  highest paid out since FY09, which is equivalent to a decent dividend yield of 2.2% for the full year. The group also declared a 1-for-50 distribution of treasury shares. Based on its last closing and existing share base, this implies an additional 2.0% yield, bringing 2011 dividend yield to 4.2%. We see room for more dividend surprises going forward as the company’s treasury shares will still total 24.3m after the proposed exercise.

Potential revival of  SCORE. In mid-Feb, HSL secured a RM82m contract  to construct  the Balingian to Jalan Persekutan  road in Sibu. With this job, we will continue to see the slow-moving onstruction projects in East Malaysia,  particularly with in  SCORE,  finally gaining traction. We  believe  the company’s fortunes  may  turn in the run-up to  the country’s  general election. No change to our FY12 and FY13 orderbook replenishment estimates of RM400m and RM500m respectively for now.

BUY. Following the release of HSL’s full year FY11 results, we are fine-tuning our model for book-keeping purposes. As a consequence, our FY12 and FY13 EPS estimates are revised downwards marginally by 1.9% and 1.6% respectively. We maintain our BUY call on HSL, pegging its long term average 1-year forward PER  at  12x bringing its  FV to RM1.99.

Source: OSK188