Hock Seng Lee - Results below expectations -s more job newsflow expected in 2H BUY

- We maintain BUY on Hock Seng Lee (HSL), with a lower sum-ofparts 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.

- The valuation is supported by net cash of 40 sen/share. We maintain our RNAV for its 890acre landbank at 65 sen/share. 

- HSL’s 1QFY12 results were below expectations, with a net profit of RM19.6mil (-25% QoQ; +11% YoY) – accounting for only 18% of our forecast for FY12F, and 20% of consensus. As expected, no interim dividend was declared.

- The construction division accounted for only 17% of our forecast’s turnover for that segment, while property development did better at 30%.

- EBITDA margin was maintained at 19% vs. a year earlier, but down over 3ppts from the previous quarter. EBITDA of RM26.9mil represented only 17% of our forecast. 

- As such, we are maintaining our overall EBITDA margin assumption at 18%, but have lowered our turnover projections and earnings for FY12F by about 16% each, to account for most of the new jobs that may only be secured in the second half of the year. 

- We maintain our annual new order book assumption at RM600mil for FY12F-FY14F. Year-to-date, HSL has secured RM155mil of projects. 

- From our channels checks, we believe many of the announcements on the award of SCORE and other infrastructure jobs may only be made in 2H12 – possibly pending the General Election and thereafter.

- HSL currently has RM1.7bil worth of jobs in hand, of which RM1.0bil is 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) the construction of the Samalaju port; 3) participation in the construction of power-related plants and ancillary  jobs; and various roads, water, 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: OSK