Hock Seng Lee - Keeping up the momentum BUY

- We maintain BUY on Hock Seng Lee Bhd (HSL), with a downward revised sum-of-parts fair value of RM2.48/share (vs. RM2.59/share previously), which includes a PE of 8x against its 3-year average forward earnings for its construction division. The valuation is supported by net cash of 44 sen/share (FY13F) and RNAV for its 890 acre-landbank at 65 sen/share.

- HSL posted a net profit of RM25.9mil (+14% QoQ, -0.9% YoY) for 4QFY12 – bringing its full-year earnings to RM90.7mil (+3.9% YoY). This was within expectations, vis-à-vis our estimate of RM90.9mil and consensus’ RM90.6mil.

- It declared final and and special gross dividends of 2 sen/share and 0.6 sen/share, respectively. It had earlier declared the first interim gross dividend of 1.4 sen/share. The total payout of 4 sen/share (+11% YoY) fell short of our estimate of 4.4 sen/share.

- We have adjusted downwards our FY13F-FY14F GDPS forecast to 4.6 sen and 5.2 sen, from the earlier 5 sen and 5.6 sen, respectively. We have also tweaked our FY13F-FY14F earnings downwards by 15% and10% on the back of a 17% and 14% cut in revenue, respectively, stemming from the latest composition of its order book. We estimate HSL currently has some RM1.8bil worth of external jobs in hand, with about ~RM1.04bil still outstanding.

- We introduce an FY15F net profit at a conservative RM122mil, or a growth of 5%, pending confirmation of more jobs being secured. We maintain our assumption of RM600mil new jobs annually for the next three years. For FY12, it had secured some RM525mil worth of new projects (vs. RM313mil in 2011), completing some RM414mil worth of jobs.

- For FY12, construction operating margins remained stable at 19%-20%, compared to FY11’s levels. We are maintaining those margins for the subsequent years.

- Its largest on-hand project is still the Kuching City Centralised Wastewater Management project (Package 1), with work on the last mile lasting until 2014. Looking ahead, it will be bidding for the remaining phases of the project.

- We continue to like HSL for its:- 1) strong earnings visibility over FY12F-FY14F, 2) strong balance sheet, including the RM200mil cash in hand as at 31 December 2012, 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 FY13FFY15F PEs of 7x-8x.

Source: AmeSecurities