Hock Seng Lee - Wins RM26mil; more contract awards expected in 2H

-  We maintain BUY on Hock Seng Lee (HSL), with a sum-of-parts fair value of RM2.59/share (vs. RM2.76 previously), which includes a PE of 9x against its 3-year average forward earnings for its construction division.

-  HSL yesterday announced the securing of a RM26mil contract with Sarawak’s Ministry of Industrial Development for infrastructural works at the Demak Laut Industrial Park in Kuching.

-  The scope of works includes earthworks, sand-filling, water reticulation, drainage, road and associated jobs.  It is slated to be completed by January 2014. Earthworks involving land engineering form part of HSL’s unique expertise that is in demand, given a large part of the state is composed of swamps and marshland.  

-  This brings the total amount of contracts announced year-to-date to RM181mil. For now, we maintain our annual new order book assumption at RM600mil. We reiterate our view that the contract flows would pick up pace in the second half of the year. 

-  Following the release of its 1QFY12 results earlier, we had already cut HSL’s turnover and earnings projections, by about 16% each, to account for the delay in the awarding of construction contracts in the state. This partly stems from the state administration’s focus on preparations for the country’s impending general election.

-  HSL currently has an estimated RM1.7bil worth of jobs in hand, of which about RM1.0bil is still outstanding – with plenty more projects within Sarawak’s SCORE up for grabs, particularly in infrastructure and marine engineering works. 

-  Potential jobs in the pipeline are:- 1) The remaining RM1.7bil packages of the Kuching central sewerage system; 2) participation in the construction of powerrelated plants and ancillary jobs; 3) the RM100mil Tanjung Manis deep seaport extension, and 4) various road, rural water supply, flood mitigation and other infrastructure projects.

-  As it stands, HSL has been deeply involved in various projects in Sarawak’s economic growth nodes, including Samalaju, Mukah and Tanjung Manis. The stock is currently trading at an undemanding FY12F-FY14F PEs of 6x-9x.

Source: AmeSecurities