KUALA LUMPUR (Sept 13): AmInvestment Bank Research has upgraded Hock Seng Lee Bhd (HSL) to "Hold" from "Underweight" with an increased fair value (FV) of RM1.25 (from RM1.05 previously).

The research house said it increased the company's FY20-21F net profit forecasts by 7% and 8% respectively and raised the fair value based on 10 times revised FY20F earnings per share (EPS) at a premium to its benchmark forward target price to earnings ratio of eight times for small-cap construction stocks to reflect HSL's niche strength in marine works/land reclamation.

"We are raising our order book replenishment assumption for FY19F to RM1 billion (from RM650 million previously) to bring ourselves in line with the company's latest guidance," said AmInvestment Bank.

The research house said the company had guided for a bumper year in terms of job wins in FY19F as it aimed to bag RM300 million worth of new jobs for the rest of the year to add to its current RM700 million bagged thus far, which includes RM100 million worth of internal building works.

If HSL succeeds, it will end FY19F with RM1 billion job wins and an outstanding order book of RM2.8 billion versus RM2.5 billion currently.

The company, however, believes that it is too soon to provide specific guidance for FY20F, according to AmInvestment Bank.

"While HSL has positioned itself by submitting tenders for government contracts 'to tune of a few billion ringgit', the chances of them filtering down to job wins depend on the competitiveness of HSL's bids, and more importantly, the timing of the contracts," it said.

HSL acknowledged that the rollout federal-funded government jobs are also delayed, with AmInvestment Bank attributing the delays to budgetary constraints and bureaucracy.

"HSL has made good progress on its three mega projects [Pan Borneo Highway, Miri Wastewater Management System and Kuching City Central Wastewater Management System (Phase 2)]. They are either on or ahead of schedule," said AmInvestment Bank.

The research house, however, states that it will remain cautious on the outlook for the construction sector as the government has a very limited space of fiscal manoeuvre with the still elevated national debt.

"For HSL, the uncertain sector outlook is partially mitigated by its competitiveness due to its niche strength in marine works/land reclamation," it said.

In terms of its property business, HSL managed to register RM46 million sales in 1HFY19 compared with RM28 million a year ago, boosting its unbilled sales to RM250 million from RM210 million a year ago despite challenges in the market.

"This should help sustain its property earnings (which typically make up 20-40% of group earnings) for the next 2-3 years," it said.

See also: Hock Seng Lee 2Q profit rises on higher construction and property development income