This article first appeared in The Edge Financial Daily on November 14, 2019

Hock Seng Lee Bhd
(Nov 13, RM1.31)
Maintain buy with a lower target price (TP) of RM1.62: Historical patterns suggest that the first half (1H) revenue on average comprises 46.5% of the full-financial year revenues (financial year 2014-2018 [FY14-18]). This leads us to expect it to chalk a better performance in 2HFY19, on more working days amid lesser festive celebrations and better weather in the 2H. We expect no major delays from the construction segment. On construction margins, we expect profit before tax (PBT) margins to remain similar — or be better than that of 1HFY19 — at 9.8%. As such, we estimate (third quarter of financial year 2019 [3QFY19]) core earnings at RM16.9 million to RM17.2 million, implying a quarter-on-quarter (q-o-q) and year-on-year (y-o-y) improvement.

We expect the new FY19 contract win target to be RM1 billion from RM600 million. In our view, the additional RM400 million could come from a mixture of building contracts as well as infrastructure jobs. We lift our financial year 2019-2020 forecast (FY19F-20F) new order win assumptions to RM1 billion and RM600 million from RM600 million and RM400 million previously. We remain positive on job flows in Sarawak, mainly from the second trunk road, and potentially from the recently announced Sabah-Sarawak Link Road. Hock Seng Lee Bhd’s (HSL) outstanding order book stands at RM2.5 billion, which represents a 4.1 times outstanding order book-to-revenue ratio.

Our earnings forecasts increase by 10.3%, 1.8% and 8.9% for FY19F-21F, after imputing a higher order book win assumption and property earnings. We roll forward our base year to FY20F and cut our net cash assumption to be in line with its 2QFY19 numbers. Meanwhile, we maintain a 12 times target price-to-earnings (P/E) to construction earnings and 30% discount to the revised net asset value for its property division.

We reiterate “buy”, new sum-of-parts-derived RM1.62 TP from RM1.79, 24% upside with 3% FY20F yield. We remain optimistic about HSL and the construction activities in Sarawak after a recent discussion with management. We expect 2HFY19 earnings to be seasonally stronger than 1HFY19. HSL is one of the key beneficiaries of Sarawak’s economic development. The stock currently trades at an undemanding 10 times FY20F earnings per share, at -1.23 standard deviation from its five-year average forward P/E, and close to its 52-week low.

The key downside risks include failure to secure new contracts, and a prolonged downturn in the retail and property markets. — RHB Research Institute, Nov 13