Hock Seng Lee - Healthy balance sheet and job flows support growth BUY

- We maintain BUY on Hock Seng Lee Bhd (HSL), with a sumof-parts 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 39 sen/share and RNAV for its 890acre-landbank at 65 sen/share.

- HSL yesterday announced the securing of a RM39.5mil subcontract with PN Construction Sdn Bhd  for the construction of the Senibong Secondary School, Sarawak.

- The scope of works includes earthworks, pilling and building works, mechanical and electrical services and related external works. The project is scheduled to be completed in the third quarter of 2014.

- This brings its year-to-date new orders to RM512mil, well surpassing that of RM313mil for last year – but still about RM88mil short of our assumption of RM600mil annually for the next three years. 

- Nonetheless, this excludes the smaller jobs that would have been secured, but not announced. For now, we maintain our FY12F-FY14F forecasts, as the securing of jobs could also just be a matter of timing.

- Out of the RM1.5bil jobs still in hand, nearly RM1.1bil remains outstanding. Prior to this, HSL had announced a RM291mil contract for the construction of a UiTM new campus in Mukah, Sarawak.

- Along with KKB Engineering Bhd (BUY, FV: RM1.80/share), HSL is among the main beneficiaries of more rural infrastructural projects planned for the state, either by the local authorities for SCORE or the federal government under Budget 2013.

- HSL is scheduled to announce its 3QFY12 results later this month. HSL had a strong set of 1HFY12 results that came in within our and consensus forecasts. Other than the P&L performance, its cash pile of nearly RM200mil in particular stands out. We also maintain our overall group EBITDA margin assumption at 18%. 

- We continue to 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.

- The stock continues to trade at an undemanding FY12FFY14F PEs of 7x-10x.   

Source: Kenanga