Stock Name: HSL
Company Name: HOCK SENG LEE BHD
Research House: AMMB
Hock Seng Lee Bhd
(May 24, RM1.72)
Re-initiating coverage with a buy call with sum-of-parts-derived fair value of RM2.30: Our fair value pegs HSL's mainstay construction operations at 10 times FY11F/12F average earnings. Earnings are expected to retain their strong trajectory.
The bulk of HSL's billings for the RM452 million Kuching sewerage project and the high-end The Leaf property sales should start accruing from this year, along with FY10's RM532 million new contracts.
Even as we impute lower margins from higher material costs for certain road and building works, FY11's net profit is forecast to grow 28% year-on-year on the back of a 36% y-o-y revenue expansion.
Year-to-date, its order book replenishment stands at RM108 million, representing nearly a quarter of our FY11F new contract assumptions and nearly twice that of the same period last year.
The group is targeting RM550 million (our assumption is RM500 million) new contracts this year; with a particular focus on the Sarawak Corridor of Renewable Energy's (Score) agro-based growth node of Tanjung Manis.
Projects earmarked by HSL in Tanjung Manis this year include the RM350 million deepsea port extension, more than 100km of access roads and various high-margin marine civil works.
Also expected this year is the announcement of the remaining packages of RM2 billion worth of road jobs linking Score's energy sites involving 21 open tenders that were closed last year. HSL has tendered for seven of these.
Each package is valued at RM50 million to RM150 million. IJM Corp, Cahya Mata Sarawak Bhd (CMSB) and Loh & Loh Bhd Corp Bhd secured the early packages last year.
Our checks with management revealed that the group should soon conclude a RM200 million sub-contract for a building job in Score's administrative centre in Mukah.
Also being planned are additions to its landbank with a view to participate in the federal government's low-cost housing schemes.
The Kuching sewerage project's (Phase 1, Package 1) main shafts have been 70% tunnelled ' freeing the project of its tunnel boring machines (TBM) which would then lead to the start of the balance of phase 1 (RM1.7 billion).
As the incumbent contractor and sole owner of Borneo's only TBM, we believe HSL is the most eligible for the remaining packages. We anticipate this to happen next year.
More importantly, with the Bakun Dam now expected to be commissioned by 1HFY11, we gather that the investments pledged under Score are all but under way; just awaiting the crucial energy tariff agreement between Bakun's owner Sarawak Hidro Sdn Bhd and Sarawak Energy Bhd.
At that juncture, we expect a re-acceleration of building and infrastructure works along Score's growth nodes.
Currently trading at a 10% to 20% discount (FY11F/12F) against its long-term price-earnings ratio of 12 times, HSL allows investors a direct exposure in SCORE's immense prospects. ' AmResearch, May 24
This article appeared in The Edge Financial Daily, May 25, 2011.
Company Name: HOCK SENG LEE BHD
Research House: AMMB
Hock Seng Lee Bhd
(May 24, RM1.72)
Re-initiating coverage with a buy call with sum-of-parts-derived fair value of RM2.30: Our fair value pegs HSL's mainstay construction operations at 10 times FY11F/12F average earnings. Earnings are expected to retain their strong trajectory.
The bulk of HSL's billings for the RM452 million Kuching sewerage project and the high-end The Leaf property sales should start accruing from this year, along with FY10's RM532 million new contracts.
Even as we impute lower margins from higher material costs for certain road and building works, FY11's net profit is forecast to grow 28% year-on-year on the back of a 36% y-o-y revenue expansion.
Year-to-date, its order book replenishment stands at RM108 million, representing nearly a quarter of our FY11F new contract assumptions and nearly twice that of the same period last year.
The group is targeting RM550 million (our assumption is RM500 million) new contracts this year; with a particular focus on the Sarawak Corridor of Renewable Energy's (Score) agro-based growth node of Tanjung Manis.
Projects earmarked by HSL in Tanjung Manis this year include the RM350 million deepsea port extension, more than 100km of access roads and various high-margin marine civil works.
Also expected this year is the announcement of the remaining packages of RM2 billion worth of road jobs linking Score's energy sites involving 21 open tenders that were closed last year. HSL has tendered for seven of these.
Each package is valued at RM50 million to RM150 million. IJM Corp, Cahya Mata Sarawak Bhd (CMSB) and Loh & Loh Bhd Corp Bhd secured the early packages last year.
Our checks with management revealed that the group should soon conclude a RM200 million sub-contract for a building job in Score's administrative centre in Mukah.
Also being planned are additions to its landbank with a view to participate in the federal government's low-cost housing schemes.
The Kuching sewerage project's (Phase 1, Package 1) main shafts have been 70% tunnelled ' freeing the project of its tunnel boring machines (TBM) which would then lead to the start of the balance of phase 1 (RM1.7 billion).
As the incumbent contractor and sole owner of Borneo's only TBM, we believe HSL is the most eligible for the remaining packages. We anticipate this to happen next year.
More importantly, with the Bakun Dam now expected to be commissioned by 1HFY11, we gather that the investments pledged under Score are all but under way; just awaiting the crucial energy tariff agreement between Bakun's owner Sarawak Hidro Sdn Bhd and Sarawak Energy Bhd.
At that juncture, we expect a re-acceleration of building and infrastructure works along Score's growth nodes.
Currently trading at a 10% to 20% discount (FY11F/12F) against its long-term price-earnings ratio of 12 times, HSL allows investors a direct exposure in SCORE's immense prospects. ' AmResearch, May 24
This article appeared in The Edge Financial Daily, May 25, 2011.
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