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Friday, March 18, 2016

Brokers Report: Hock Seng Lee Bhd - Sarawak heating up

Maintain buy, with a higher target price (TP) of RM2.40

Hock Seng Lee

Maintain BUY, with a raised TP of MYR2.40

HSL’s Kuching Centralised Sewerage Package 2 job win worth MYR750m is a positive surprise as the project value is higher than expected. We expect more construction jobs to be dished out in Sarawak as the state election looms closer. We raise our 2016 job win and EPS forecasts given the strong job wins todate. Reiterate BUY with a higher TP of MYR2.40 (+7%) on unchanged 12.5x 2017 PER.

Higher-than-expected project value

HSL-led Kumpulan Nishimatsu-HSL Consortium (75% owned) has won the Kuching Centralised Sewerage: Package 2 (P2) from Sewerage Services Department of Sarawak worth MYR750m. This is 42% higher than P1’s MYR530m as P2 has a wider coverage. P2’s project value is also higher than expected, of MYR500m. The job scope covers construction and commissioning of a wastewater treatment plant and other related works. The works are expected to complete in 72 months by 2Q22.

More job awards in the pipeline

This latest win has lifted HSL’s outstanding orderbook significantly by 85% to MYR1.2b. Assuming a pretax profit margin of 15%, we forecast a net profit contribution of MYR63m (11.5sen EPS) into 2022. YTD job win amounts to MYR621m (vs. total win of MYR275m in 2015). More job awards from SCORE and Pan Borneo Highway Sarawak could be expected as we inch closer to Sarawak election expected to be held in Apr 2016. In the long run, HSL could continue to benefit from the whole Kuching sewerage project worth MYR4b that would be implemented in 8 phases.

Record job win in 2016?

Given its strong job wins todate, we raise our 2016 job win forecast to MYR1.6b (+23%) and subsequently raise our 2016/17/18 EPS forecasts by +1%/+15%/+13%. Our new TP is MYR2.40 (+7%) based on unchanged 12.5x 2017 PER. HSL could achieve record high annual job win in 2016 that would lead to another step up in earnings. Reiterate BUY.

Source: Maybank IB Research, 18 March 2016

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