Hock Seng Lee Bhd
(Nov 19, RM1.31)
Maintain hold with an unchanged fair value (FV) of RM1.25: We maintain our “hold” call, forecasts and FV of RM1.25 based on 10 times financial year 2020 forecast (FY20F) earnings per share, at a premium to our benchmark forward target price-earnings ratio of eight times for small-cap construction stocks to reflect Hock Seng Lee Bhd’s (HSL) niche strength in marine works and land reclamation.

 
HSL’s nine months of financial year 2019 (9MFY19) net profit met expectations at 75% and 71% of our and consensus full-year forecasts respectively. Its 9M net profit grew 7% year-on-year (y-o-y), driven by stronger property profits and a higher interest income, while construction earnings were relatively flat. Despite its top line growing 6%, its construction earnings before interest and tax (Ebit) only rose 1% as its Ebit margin contracted 0.4 percentage point to 8.4% due to increased competition and a general rise in construction cost.

Thus far, in FY19F, HSL has secured new jobs worth about RM700 million and its outstanding construction order book is at RM2.5 billion. Our forecasts assume job wins of RM1 billion in FY19F — a bumper year unlikely to recur over the short term — and normalising to RM400 million annually in FY20F and FY21F.

We remain cautious about the outlook for the construction sector. The government has very limited space for fiscal manoeuvre given the still elevated national debt. In Sarawak, while the state could step in to fill the gap with the RM11 billion state reserves-fuelled infrastructure projects comprising the Coastal Road, Second Trunk Road and 11 mega bridges — ahead of the state election which must be held by September 2021 — the roll-out of work packages from these highly publicised projects seems to have hit a snag after the initial hype.

For HSL, the uncertain sector outlook is partially mitigated by its competitiveness due to its niche strength in marine works and land reclamation. — AmInvestment Bank, Nov 19