This article first appeared in The Edge Financial Daily, on 30 November, 2015.

Hock Seng Lee Bhd
 (Nov 27, RM1.93)
Downgraded to neutral call with a lower target price (TP) of RM1.95: Hock Seng Lee Bhd (HSL) registered third quarter ended Sept 30, 2015 (3QFY15) net profit of RM17.9 million, up 4.7% quarter-on-quarter, but fell 16.5% year-on-year (y-o-y), which was below our and consensus expectations. 

Year to date (YTD), the group netted RM54.5 million (fell 3.9% y-o-y), which only constituted 66% of our and consensus estimates. 

This was due to lower margins from its construction business, which stayed stubbornly low at 14% vis-à-vis 18% a year ago, as more projects were secured 

via open tenders. 

We are adjusting our blended margins from about 18% to about 16%, and as such, our FY15 to FY17 earnings are lowered by between 11% and 15%. 

Our TP is correspondingly adjusted to RM1.95, pegged at 12 times FY16 earnings per share. 

Given the limited price upside and the 12% gain since our recent upgrade, we are lowering our call on HSL to “neutral”.

HSL could see a rerating if it can secure more chunky contracts in the Kuching central sewerage, Sarawak Corridor of Renewable Energy (Score) and Pan Borneo Highway projects.

It has an outstanding order book of RM770 million (from RM860 million in 2QFY15). YTD, the group has secured jobs worth more than RM200 million, though nothing meaningful was secured in 3QFY15. 

The jobs clinched, among others, included an access road and water intake project in the Score knowledge hub of Mukah, Sarawak.

As for new jobs eyed, the group is working on securing Phase 2 of the Kuching central sewerage project (over RM500 million) and the first package of Pan Borneo Highway. 

As indicated in our earlier report, we believe HSL should be the front runner for Phase 2 of the sewerage job, given its track record in completing Phase 1 and cost advantage for owning the tunnel boring machines used in Phase 1. 

As for Pan Borneo Highway, the first-package tender (a 35km highway) is believed to have closed, and it expects a new tender every three months for the mammoth project with a total project value of about RM27 billion. — Public Investment Bank Research, Nov 27