Hock Seng Lee - Well positioned for more jobs under Budget 2013 BUY

- We maintain BUY on Hock Seng Lee Bhd (HSL), with a sum-ofparts fair value of RM2.59/share, which includes a PE of 9x against its 3-year average forward earnings for its construction division. The valuation is supported by net cash of 40 sen/share and RNAV for its 890acre-landbank at 65 sen/share.

- Along with KKB Engineering Bhd, HSL is expected to benefit from allocations under  Budget 2013 that was unveiled earlier today. 

- The government has proposed a RM4.5bil allocation for the implementation of various projects to bridge the gap of urban and rural development in 2013.

- In particular, the allocation includes a RM1.6bil sum for rural infrastructure projects for water supply to 24,000 houses and electricity supply to 19,000 houses, as well as RM100mil to supply 40,000 water tanks for rainwater harvesting, particularly in the interiors of Sabah and Sarawak.

- Though there are no specific breakdowns that would  be allocated to Sabah and Sarawak, HSL and KKB (BUY, FV: RM1.80/share) are expected to be prime beneficiaries. Both companies have already secured various water supply jobs at the Samalaju Industrial Park and other growth nodes within SCORE as well as for various rural projects.

- HSL recently announced a strong set of 1HFY12 results that came in within our and consensus forecasts. However, other than the P&L performance, its cash pile of nearly RM200mil in particular stands out.

- For its 2QFY12, HSL declared an interim gross dividend of 1.4 sen/share vs. 1.2 sen/share a year earlier. We maintain our gross dividend forecast at 4.4 sen/share for a 20% payout ratio and a yield of 2.7% at the current price.

- Job flows have been strong. It recently announced a RM291mil contract for the construction of a UiTM new campus in Mukah, Sarawak. Its YTD new orders were ramped up to RM472mil, surpassing that of RM313 million for last year. Of over RM2.0bil worth of jobs in hand, over RM1.2bil remains outstanding. 

- We maintain our annual new order book assumption at RM600mil for FY12F-FY14F. We like HSL for its:- 1)  strong earnings visibility over FY12F-FY14F, 2) strong balance sheet, including the RM200mil cash in hand, and 3) as a proxy to the strong growth in the state’s construction sector given other potential jobs in the pipeline within and without SCORE – which is now further boosted by the 2013 Budget.

- The stock is currently trading at an undemanding FY12F-FY14F PEs of 7x-10x.   

Source: AmeSecurities