Hock Seng Lee - Within Expectations

ock Seng Lee’s (HSL) 1HFY12 net profit closed at RM42.1m, representing 42.1% and 44.8% of our and consensus full-year estimates. We deem this as within expectations as we foresee a stronger 2HFY12 ahead. Its management took the opportunity to declare its first interim DPS of 1.4 sen. Having secured RM473m worth of new jobs YTD, its outstanding orderbook now stands at an estimated
RM1.15bn. Maintain BUY at a revised FV of RM2.22 based on an unchanged 12xPE as we roll forward our valuation to FY13.

Within expectations. HSL posted 1HFY12 revenue of RM151.7m with higher topline contributions from its construction segment which grew 7.0% y-o-y to RM277.2 as well as its property division which registered a slight 1.9% increase y-o-y to RM13.7m. All in,
1HFY12 core earnings closed at RM42.1m, lifted by a 40bps margin improvement in its construction division, which helped to offset a slight blip in its property margin.

A decent quarter. On a quarterly basis, 2QFY12 revenue registered at RM151.7m with core earnings of RM22.5m, with numbers marking improvements for both y-o-y and q-oq. With RM473m worth of new jobs secured YTD, we believe the consistent earnings
trend will likely persist for the remainder of the year as the company leverages on its strong outstanding orderbook of an estimated RM1.15bn.

Interim DPS of 1.4 sen. HSL’s management declared its first interim DPS of 1.4 sen, translating to a payout ratio of 19.4% based on its 1HFY12 earnings. We continue to forecast a 20% payout over the next three years, given its estimated net cash balance of RM186.5m or 32.0 sen per share netting off the proposed dividend. This excludes the 24.9m treasury shares sitting in its books at an initial cost of RM23.2m.

Forecasts maintained. With the company’s results being largely in line, we make no changes to our earnings estimates at this juncture as we introduce our FY14 forecasts with core earnings of RM113.4m.

BUY. With the 13th General Election now rumored to be held only in 1Q13, we continue to believe that there could be a potential revival in construction projects in East Malaysia, particularly in the Sarawak Corridor of Renewable Energy (SCORE) as the ruling coalition pulls all stops to increase its popularity rating before the polls are called. That said, we see HSL as the best proxy to benefit from potential developments in SCORE given its strong execution track record and sturdy balance sheet, with FY14’s cash balance projected to hit RM300m. Maintain BUY with our FV revised up to RM2.22 based on an unchanged 12x PE as we roll forward our valuation to FY13.

Source: OSK