CONSTRUCTION (SARAWAK)

Transcription

1 Thomas Soon Sector report 12 Dec Investment Highlights CONSTRUCTION (SARAWAK) No stopping SCORE now Rationale for report: Sector update OVERWEIGHT (Maintained) We remain positive on Sarawak s construction sector, following a visit last week to the state s Regional Economic Corridor Development Authority (Recoda), the agency tasked with managing the Sarawak Corridor of Renewable Energy (SCORE). We met with Recoda CIO Kamil Daniel Yap in Kuching. He intimated that SCORE is on track and there is no stopping the progress of the corridor now. In fact, it is shifting into the next phase that will now also focus on light and the downstream industries. Works at Samalaju Industrial Park (SIP), which houses energy-intensive industries, is ongoing, with more waiting to set up shop at there, pending confirmation of more power coming onstream. We are told the second wave will involve more downstream and labour-intensive industries at SIP itself and the other growth nodes. These include Tanjung Manis, the revised masterplan of which has been completed and ready for implementation. Sarawak chief minister Datuk Patinggi Tan Sri Adenan Satem recently said Tanjung Manis, which is designated as the industrial port city and Halal Hub, will be ready to receive local and foreign investors by end Notably, Recoda is working with MDeC and MCMC to entice Internet giants Google and Yahoo to set up data centres at another growth node in Mukah, which is SCORE s administrative centre that will be developed as a smart city, and services and R&D hub. SCORE expects a total investment of RM334bil by 2030, 80% of which is expected to come from the private investors and the remaining 20% from government funding for basic infrastructure. The 10 priority industries are aluminium, oil-based, steel, glass, palm oil, timber, tourism, aquaculture, livestock and marine engineering. Incredibly, the SCORE programme even includes security plan along the state s entire border. It was recently reported that as of Sept 2014, 19 SCORE projects worth more than RM32bil in FDI had been approved. So far, the government has only contributed to 6% of the investments. Broadly, the federal government is primarily responsible for financing the state s infrastructure development. Driving SCORE is Sarawak s cheap power generation potential. Long term, the state has the potential to deliver 20,000MW of power that will make it the leading producer of energy in the region by Starbiz recently reported that by the middle of the next decade, residential, retail and commercial customers in Sarawak will require 2,000 MW while heavy industries will consume at least 6,000MW. So far, industries have signed up for 2,584MW of power under 13 agreements with Sarawak Energy. Outside of SCORE, the federal government is fast-tracking the RM27bil 1,663km Pan-Borneo Highway, which includes 936km of road upgrading works in Sarawak. The priorities and award of contracts would be given to upgrading accident-prone sections of the highway. Under the Federal Budget 2015, Sarawak has been allocated RM972mil for rural basic infrastructure projects. Sarawak itself has set aside development expenditure of RM4.55bil, making up 71% of a RM6.36bil state budget for next year. Over 50% of the development expenditure will be for rural projects. Given the backdrop of rapid progress in the state, particularly within SCORE and the RM27bil highway project, we expect the main construction and infrastructure players such as Cahya Mata Sarawak (Non-rated), Hock Seng Lee (BUY, FV: RM2.40/share), KKB Engineering (BUY, FV: RM2.05/share), and Naim (Non-rated) to be primary beneficiaries. The key risks are the federal government withholding funding given the precipitous decline in oil prices, further declines in oil and commodity prices that would prompt investors to delay/cancel their investments, and acute shortage of labour. Nonetheless, Sarawak s cheap power offers investors a distinct advantage. Also, the state has the highest reserves in the country, at RM22bil as of last year. PP 12246/05/2013 (032379)

2 HOCK SENG LEE CONSTRUCTION (HSL MK EQUITY, HSLB.KL) 12 Dec 2014 A SCORE mainstay Company report Thomas Soon soon-guan-chuan@ambankgroup.com Rationale for report: Company update BUY (Maintained) Price Fair Value 52-week High/Low Key Changes Fair value EPS RM1.77 RM2.40 RM2.06/RM1.66 YE to Dec FY13 FY14F FY15F FY16F Revenue (RM mil) Core net profit (RM mil) FD Core EPS (sen) FD Core EPS growth (%) (6.1) Consensus Net Profit (RM mil) DPS (sen) PE (x) EV/EBITDA (x) Div yield (%) ROE (%) Net Gearing (%) nm nm nm nm Stock and Financial Data Shares Outstanding (million) Market Cap (RMmil) 1,037.2 Book Value (RM/share) 0.92 P/BV (x) 1.9 ROE (%) 16.8 Net Gearing (%) - Major Shareholders Hock Seng Lee Enterprise (54.1%) Employees Provident Fund (9.4%) Free Float 19.9 Avg Daily Value (RMmil) 0.5 Price performance 3mth 6mth 12mth Absolute (%) (6.3) (6.3) (5.8) Relative (%) (0.7) (0.4) (1.6) Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 HSL MK FBMKLCI Index 2,000 1,800 1,600 1,400 1,200 1, Investment Highlights We remain bullish on Hock Seng Lee, with a BUY call and an unchanged SOP fair value of RM2.40/share. We met up with management last week in Kuching and was reassured that the company will continue to benefit from the rapid development within Sarawak Corridor of Renewable Energy (SCORE). Management also remains hopeful of securing the remaining packages of the RM4bil Kuching central sewerage project, the RM500mil second phase of which is expected to be awarded by 1QFY15. It is currently connecting properties to the central trunk that has been built under the over RM500mil phase one, which is expected to be completed by 1QFY15. Additionally, we believe there is still about ~RM500mil worth of flood mitigation works in Sibu yet to be awarded, which HSL could potentially be involved in. It was awarded phases 1 and 2, totalling ~RM200mil. HSL is also continuing its quest to participate in powerrelated projects. We foresee HSL as one of the main beneficiaries of the proposed RM27bil Pan-Borneo Highway project, whereby the existing trunk road will be widened and upgraded, section by section. Armed with its marine engineering expertise, HSL has completed the construction over 800km of roads in the state, with large portions being built on swampy land a technical field all by itself and an often underestimated capability of the group. Following our conversations with the SCORE development authority Recoda, Tanjung Manis is now ready to be developed into a halal hub and an industrial port city. HSL is a pioneer developer of the town. We expect it to be deeply involved in the development of the port, which has a natural deep water harbour. Notably, ~75% of its new projects over the past few years are located within SCORE. On the property development side, HSL still has 890 acres of land. A particular high-end development in Kuching, the La Promenade, has a GDV of over RM2bil over a year period. We remain a firm believer in the stock, as the Sarawak government appears determined to continue its aggressive stance in rural development. Maintain BUY. PP 12247/06/2013 (032380)

3 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Hock Seng Lee 12 Dec 2014 EXHIBIT 1: PB BAND CHART EXHIBIT 2: PE BAND CHART δ Avg -1δ δ Avg -1δ AmResearch Sdn Bhd 3

4 Hock Seng Lee 12 Dec 2014 EXHIBIT 3: FINANCIAL DATA Income Statement (RMmil, YE 31 Dec) FY12 FY13 FY14F FY15F FY16F Revenue EBITDA Depreciation/Amortisation (8.6) (9.3) (10.4) (11.8) (13.2) Operating income (EBIT) Other income & associates Net interest Exceptional items Pretax profit Taxation (30.5) (28.8) (36.8) (38.6) (41.8) Minorities/pref dividends - - (0.2) (0.4) - Net profit Core net profit Balance Sheet (RMmil, YE 31 Dec) FY12 FY13 FY14F FY15F FY16F Fixed assets Intangible assets Other long-term assets Total non-current assets Cash & equivalent Stock Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interests BV/share (RM) Cash Flow (RMmil, YE 31 Dec) FY12 FY13 FY14F FY15F FY16F Pretax profit Depreciation/Amortisation Net change in working capital 22.1 (30.3) 9.0 (3.5) (5.4) Others (70.3) (65.8) (29.7) (46.5) (51.9) Cash flow from operations Capital expenditure (12.0) (35.6) (47.4) (49.4) (47.3) Net investments & sale of fixed assets (0.4) Others (34.2) (4.6) Cash flow from investing (46.5) (40.1) (41.3) (41.0) (36.7) Debt raised/(repaid) Equity raised/(repaid) Dividends paid (26.0) (17.4) (20.5) (21.3) (23.0) Others 6.0 (10.7) (0.4) (0.6) (0.6) Cash flow from financing (20.0) (28.1) (21.0) (21.9) (23.6) Net cash flow 15.0 (41.0) Net cash/(debt) b/f Net cash/(debt) c/f Key Ratios (YE 31 Dec) FY12 FY13 FY14F FY15F FY16F Revenue growth (%) 3.7 (9.1) EBITDA growth (%) 2.8 (4.7) Pretax margin (%) Net profit margin (%) Interest cover (x) nm nm nm nm nm Effective tax rate (%) Dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Source: Company, AmResearch estimates AmResearch Sdn Bhd 4

5 CONSTRUCTION KKB ENGINEERING (KKB MK EQUITY, KKBE.KL) 12 Dec 2014 Oceanmight s modern fab yard stands ready Company report Thomas Soon soon-guan-chuan@ambankgroup.com Rationale for report: Company update BUY (Maintained) Price Fair Value 52-week High/Low Key Changes Fair value EPS RM1.55 RM2.05 RM2.76/RM1.45 YE to Dec FY13 FY14F FY15F FY16F Revenue (RM mil) Core net profit (RM mil) FD Core EPS (sen) FD Core EPS growth (%) 63.3 (14.3) Consensus Net Profit (RM mil) DPS (sen) PE (x) EV/EBITDA (x) Div yield (%) ROE (%) Net Gearing (%) nm nm nm nm Stock and Financial Data Shares Outstanding (million) Market Cap (RMmil) Book Value (RM/share) 1.08 P/BV (x) 1.4 ROE (%) 12.5 Net Gearing (%) - Major Shareholders Free Float 31.4 Avg Daily Value (RMmil) 0.1 Kho Kak Beng Holding Co. Sdn. Bhd. (40.2%) Cahya Mata Sarawak Bhd. (20.1%) Price performance 3mth 6mth 12mth Absolute (%) (34.0) (31.1) (41.5) Relative (%) (30.1) (26.8) (38.9) Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 KKB MK FBMKLCI Index 2,000 1,800 1,600 1,400 1,200 1, Investment Highlights We reiterate our BUY call on KKB Engineering, with an unchanged fair value of RM2.05/share a 5% discount to our SOP of RM2.15/share by virtual of its associate Oceanmight s oil and gas fabrication potential in Sarawak. With a small group of institutional investors, we met up with management and visited Oceanmight s fabrication yard in Kuching last week. The modern yard covers an area of 70 acres (283,000 sq m), including 9 acres (37,000 sq m) of covered fabrication workshops that are equipped with automated production lines. The open fabrication area, which has been leveled and paved, covers 195,186 sq m. Ideally situated at the mouth of Sarawak River and a stone s throw away from the South China Sea, the yard is equipped with a 30,000-tonne loadout capacity jetty that has a natural depth of 9m. The yard has a fabrication capacity of 20,000 tonnes per annum. Oceanmight is currently undertaking its maiden RM14.5mil contract to fabricate a wellhead platform for a marginal oilfield in Tanjong Baram, Miri. We understand that it is two weeks ahead of schedule with the mainframe structure already completed in the fast-track six-month project. It is scheduled to be completed by March next year. We get the sense that Oceanmight s yard stands ready to receive more jobs. Management is hopeful, and some news could be had by 1QFY15. We remain convinced that it would get its fair share of jobs despite Petronas decision to cut annual capex by 15%-20%. As mentioned earlier, Oceanmight s fabrication tender book stands at RM960mil. We maintain our conservative job win assumptions for Oceanmight at RM80mil per annum for FY15F-FY16F and at RM130mil for FY17F. Just as the case for Hock Seng Lee and with the state authorities pushing ahead with its rural development programme, we believe KKB itself will benefit from more contracts in its conventional activities in pipe manufacturing and supply, as well as in the construction and engineering sector. Management remains optimistic about its prospects within SCORE, with many more rural water supply and infrastructure development activities to be carried out. We maintain BUY, for its prospective growth in the O&G sector. PP 12247/06/2013 (032380)

6 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 KKB Engineering 12 Dec 2014 EXHIBIT 1: PB BAND CHART EXHIBIT 2: PE BAND CHART δ Avg δ δ Avg δ AmResearch Sdn Bhd 6

7 KKB Engineering 12 Dec 2014 EXHIBIT 3: FINANCIAL DATA Income Statement (RMmil, YE 31 Dec) FY12 FY13 FY14F FY15F FY16F Revenue EBITDA Depreciation/Amortisation (4.9) (7.5) (9.0) (9.5) (10.2) Operating income (EBIT) Other income & associates 0.1 (0.8) Net interest Exceptional items Pretax profit Taxation (5.0) (12.2) (9.6) (12.2) (13.3) Minorities/pref dividends (1.4) (1.5) (0.1) (0.1) (0.1) Net profit Core net profit Balance Sheet (RMmil, YE 31 Dec) FY12 FY13 FY14F FY15F FY16F Fixed assets Intangible assets Other long-term assets Total non-current assets Cash & equivalent Stock Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interests BV/share (RM) Cash Flow (RMmil, YE 31 Dec) FY12 FY13 FY14F FY15F FY16F Pretax profit Depreciation/Amortisation Net change in working capital 24.9 (28.0) 40.4 (15.6) 2.1 Others (11.3) (10.1) (17.5) (11.5) (15.3) Cash flow from operations Capital expenditure (28.2) (32.0) (10.4) (9.0) (17.8) Net investments & sale of fixed assets Others Cash flow from investing (6.3) (0.9) (9.6) (7.7) (16.0) Debt raised/(repaid) (15.8) (1.9) (4.3) (3.7) (3.6) Equity raised/(repaid) Dividends paid (9.7) (14.8) (12.9) (18.0) (19.3) Others (2.5) (2.5) (0.6) (0.5) (0.5) Cash flow from financing (28.0) (19.2) (17.8) (22.3) (23.5) Net cash flow 11.2 (3.6) Net cash/(debt) b/f Net cash/(debt) c/f Key Ratios (YE 31 Dec) FY12 FY13 FY14F FY15F FY16F Revenue growth (%) (28.9) 37.3 (18.9) 21.6 (1.4) EBITDA growth (%) (53.1) 75.6 (16.4) Pretax margin (%) Net profit margin (%) Interest cover (x) nm nm nm nm nm Effective tax rate (%) Dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Source: Company, AmResearch estimates AmResearch Sdn Bhd 7

8 KKB Engineering 12 Dec 2014 Published by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 1 5 t h F l o o r B a n g u n a n A m B a n k G r o u p 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 0 3 ) ( r e s e a r c h ) F a x : ( 0 3 ) Printed by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 1 5 t h F l o o r B a n g u n a n A m B a n k G r o u p 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 0 3 ) ( r e s e a r c h ) F a x : ( 0 3 ) The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 8