Friday 29 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly, on March 28 - April 3, 2016.

CLOSING at RM2.07 last Tuesday after multiple contract wins, Kuching-based builder Hock Seng Lee Bhd (HSL) looks poised to challenge its all-time high of RM2.66 recorded in March 1997, especially if its winning streak continues with Sarawak counters on investors’ radar screen ahead of the state elections.

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The stock has already gained 28.6% from its 52-week low of RM1.61 registered on Aug 24 last year. Five of the six analysts polled on Bloomberg, who updated their calls on March 18 and 21 following the construction company’s recent contract wins, have a “buy” on it at the time of writing. Their target prices range from Kenanga Investment Bank Research’s RM2.19 to AmInvestment Bank’s RM2.80, or an average of RM2.48 apiece. The nearest to this is Maybank Investment Bank’s RM2.45.

Investors interested in trading HSL have an alternative in Kenanga Investment Bank Bhd-issued cash-settled call warrants HSL-CD. The warrants — issued at 15 sen apiece on March 14 — have an exercise ratio of 1.5 HSL-CD to one share. The exercise price is RM2 apiece and expiry is on Nov 11 this year.

Closing as high as 21.5 sen on March 21 before ending at 20 sen last Tuesday, HSL-CD gained 33.3% over five market days, during which time the underlying share rose 4.5% from RM1.98 to RM2.07.

At 21.5 sen, HSL-CD was at an 11.1% premium to the underlying share. If HSL rises 18.4% to reach Maybank-IB’s RM2.45 target price in the next six months, HSL-CD should theoretically be worth 50% more at 30 sen apiece, assuming zero premium to the underlying share.

In the same vein, HSL-CD should theoretically be worth 166.7% more at 53.34 sen if HSL breaches its all-time high, rising 35.3% to RM2.80 apiece in the coming six months.

According to Maybank-IB, HSL’s “record high job wins in 2016 would lead to a strong step-up in 2017 earnings and higher 2017 dividends too”. Its RM2.45 target price is based on an unchanged 12.5 times 2017 earnings after raising its forecast by 3% after HSL’s 70%-owned unit clinched a RM1.7 billion, 51-month contract to build the Pan-Borneo Highway, which doubled the group’s outstanding order book to RM2.4 billion.

“Assuming a pretax profit margin of 12%, we forecast a net profit contribution of RM108 million (20 sen EPS) into 2020 … There could be further job wins from other infrastructure projects, including SCORE, as we inch closer to the Sarawak election expected to be held in April,” Maybank-IB’s Chai Li Shin wrote in a March 21 note. 

 

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