Stock Name: HSL
Company Name: HOCK SENG LEE BHD
Research House: OSK
Hock Seng Lee Bhd
(Jan 14, RM1.89)
Maintain 'buy' at RM1.87 with target price of RM2.32: During our one-day OSK-DMG Asean Corporate Day in Singapore last week, HSL's management met up with 13 fund managers and buy-side analysts. As most of the funds were Singapore-based, very few were familiar with the company but what piqued their interest was the strong 67.6% run-up in HSL's shares last year, as well as its consistent earnings record.
While the official deadline for the Sarawak elections is in May, the management is unsure of the actual date. We have been strong promoters of the Sarawak infrastructure theme in the past year, partially fuelled by the upcoming state elections. Our call proved right as contract awards in Sarawak surged 44.9% to RM1.68 billion last year. While there are concerns that the contract flow may diminish post-election, the management believes otherwise and expects to know the outcome of most of its tenders after the polls.
Last year, HSL managed to secure RM532 million worth of jobs, which marginally surpassed our RM500 million target. This year, management is confident of bagging another RM500 million in new wins, with an upside potential of RM600 million, versus our assumption of a conservative RM400 million. In the near term, HSL may bag two road packages collectively worth RM150 million. It is also eyeing the Tg Manis port extension (RM300 million), Mukah airport extension (RM300 million), an education facility (RM260 million) and a flyover job (RM100 million).
We understand that the government intends to implement a mass affordable housing project across Sarawak worth RM1 billion. Another RM1 billion has also been allocated for rural infrastructure and utilities. While these jobs are sizeable, they will be broken up into packages worth RM20 million to RM30 million each, and we expect HSL to win some.
The management indicated that Phase 2 of the Kuching Wastewater Project is now 30% complete and on track for the 2Q2014 deadline. HSL has submitted its proposal for Phase 2 (RM500 million), with the results possibly made known after the state elections. The entire job over 4 phases is worth RM2.2 billion.
Given HSL's experience with Phase 1 and possession of the necessary equipment, we think it stands a good chance with the subsequent phases. We also gather that HSL is in discussions on a concession to maintain the wastewater system once it is completed.
HSL's 4Q results will be announced sometime in February and the management is confident of achieving about RM70 million in earnings for the full year FY10, which is pretty much in line with our forecast of RM72.2 million. We make no changes to our earnings estimate, which implies an FY10-12 CAGR of 21.3%. Our RM2.32 target price continues to be based on 14.5 times FY11 earnings, which is 2 standard deviations above its historical mean PER. We argue that the stock's premium valuations are warranted given: (i) its uninterrupted earnings growth for eight consecutive years at a 25.1% CAGR, (ii) above-industry profit margins, (iii) net cash position, and (vi) expertise in marine engineering. -- OSK Investment Research, Jan 14
This article appeared in The Edge Financial Daily, January 17, 2011.
Company Name: HOCK SENG LEE BHD
Research House: OSK
Hock Seng Lee Bhd
(Jan 14, RM1.89)
Maintain 'buy' at RM1.87 with target price of RM2.32: During our one-day OSK-DMG Asean Corporate Day in Singapore last week, HSL's management met up with 13 fund managers and buy-side analysts. As most of the funds were Singapore-based, very few were familiar with the company but what piqued their interest was the strong 67.6% run-up in HSL's shares last year, as well as its consistent earnings record.
While the official deadline for the Sarawak elections is in May, the management is unsure of the actual date. We have been strong promoters of the Sarawak infrastructure theme in the past year, partially fuelled by the upcoming state elections. Our call proved right as contract awards in Sarawak surged 44.9% to RM1.68 billion last year. While there are concerns that the contract flow may diminish post-election, the management believes otherwise and expects to know the outcome of most of its tenders after the polls.
Last year, HSL managed to secure RM532 million worth of jobs, which marginally surpassed our RM500 million target. This year, management is confident of bagging another RM500 million in new wins, with an upside potential of RM600 million, versus our assumption of a conservative RM400 million. In the near term, HSL may bag two road packages collectively worth RM150 million. It is also eyeing the Tg Manis port extension (RM300 million), Mukah airport extension (RM300 million), an education facility (RM260 million) and a flyover job (RM100 million).
We understand that the government intends to implement a mass affordable housing project across Sarawak worth RM1 billion. Another RM1 billion has also been allocated for rural infrastructure and utilities. While these jobs are sizeable, they will be broken up into packages worth RM20 million to RM30 million each, and we expect HSL to win some.
The management indicated that Phase 2 of the Kuching Wastewater Project is now 30% complete and on track for the 2Q2014 deadline. HSL has submitted its proposal for Phase 2 (RM500 million), with the results possibly made known after the state elections. The entire job over 4 phases is worth RM2.2 billion.
Given HSL's experience with Phase 1 and possession of the necessary equipment, we think it stands a good chance with the subsequent phases. We also gather that HSL is in discussions on a concession to maintain the wastewater system once it is completed.
HSL's 4Q results will be announced sometime in February and the management is confident of achieving about RM70 million in earnings for the full year FY10, which is pretty much in line with our forecast of RM72.2 million. We make no changes to our earnings estimate, which implies an FY10-12 CAGR of 21.3%. Our RM2.32 target price continues to be based on 14.5 times FY11 earnings, which is 2 standard deviations above its historical mean PER. We argue that the stock's premium valuations are warranted given: (i) its uninterrupted earnings growth for eight consecutive years at a 25.1% CAGR, (ii) above-industry profit margins, (iii) net cash position, and (vi) expertise in marine engineering. -- OSK Investment Research, Jan 14
This article appeared in The Edge Financial Daily, January 17, 2011.
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