Hock Seng Lee - Results in line; cash and share dividend surprise on the upside BUY

Stock Name: HSL
Company Name: HOCK SENG LEE BHD

Research House: AMMB

Price Call: BUY

Target Price: 2.65

We maintain BUY on Hock Seng Lee (HSL), with an upward revisedsum-of-parts-derived fair value of RM2.65/share (vs. RM2.44/share previously),which includes a PE of 9x against its 3-year average forward earnings for itsconstruction division.

We have rolled forward our valuation years to FY12-FY14. HSL'snet profit of RM87mil for Y11 (+19% YoY) came in within expectations ' at amere 1ppt above our forecast and 1ppt below consensus. We introduce FY14F netprofit at RM137mil (+10% YoY).

No major surprises could be gleaned from the full-yearresults, except for a higher-than-expected dividend as well  as an earlier-than-expected distribution oftreasury shares. 

It proposed a final dividend of 1.8 sen/share and a special dividendof 0.6 sen/share, bringing the total for the full year to 3.6 sen/share, vs. 3sen/share (excluding treasury distribution) for FY10. We had expected dividendto be maintained at 3 sen/share.

With the latest dividend, the net payout ratio is maintainedat 17% as it was the previous year. We now assume a 17% net payout ratio forFY12F-FY14F, translating into an annual GDPS of between 4.4 sen and 5.6 sen, oryields of 2.7%-3.4% at the current price.

For the share dividend, it will distribute one treasuryshare for every 50 shares held (totalling nearly 11mil treasury shares) ' equivalentto 3.2 sen/share at RM1.60/share. This would be the second time in as manyyears that HSL is distributing its treasury shares, with the first in FY10 ofthe same ratio. After the latest distribution, over 24mil shares would remainin treasury. The share dividend's ex- and entitlement dates have been fixed for26 and 28 March 2012, respectively.

HSL maintained its growth momentum in 4QFY11, with a net profitof RM26mil (+21% YoY; +16% QoQ). Crucially, operating margin of theconstruction division was maintained at above 20% for 4QFY11 and the full year,while better margins also aided the property division in view of fewer launchesand sales. 

HSL currently has RM1.7-RM1.8bilbil worth of jobs in hand,of which RM1.1bil is outstanding ' with plenty more projects within Sarawak'sSCORE up for grabs. 

 It is activelyseeking opportunities in the power sector and it may soon secure a RM250mileducation facility in Mukah. The remaining phases (worth RM1.7bil) of theKuching central sewerage project are also up for grabs this year, with the RM452milphase one currently being carried out by HSL. HSL remains as one of the primaryproxies to the rapid  pace of developmenttaking shape in Sarawak. 

Source: AmeSecurities