Company report AmResearch Sdn Bhd www.amesecurities.com.my 603 2036 2300 CONSTRUCTION HOCK SENG LEE (HSL MK, HSLB.KL) 23 May 2012 Results below expectations; more job newsflow expected in 2H Rationale for report: Company result BUY (Maintained) Price RM 1.47 Fair Value RM 2.59 52-week High/Low RM1.73/RM1.19 Key Changes Fair value EPS Investment Highlights We maintain BUY on Hock Seng Lee (HSL), with a lower sum-ofparts fair value of RM2.59/share (vs. RM2.76 previously), which includes a PE of 9x against its 3-year average forward earnings for its construction division. YE to Dec FY11 FY12F FY13F FY14F Revenue (RM mil) 581.5 677.1 810.8 877.4 Core net profit (RM mil) 87.3 90.9 121.1 129.7 EPS (sen) 15.8 16.3 21.7 23.3 EPS growth (%) 17.9 3.0 33.2 7.1 Consensus EPS (sen) 15 17.4 18.5 20.3 DPS (sen) 3.6 4.4 5.0 5.6 PE (x) 9.3 9.0 6.8 6.3 EV/EBITDA (x) 5.8 5.2 3.6 3.0 Div yield (%) 2.4 3.0 3.4 3.8 ROE (%) 23.1 20.4 22.7 20.3 Net Gearing (%) net cash net cash net cash net cash Stock and Financial Data Shares Outstanding (million) 582.7 Market Cap (RM mil) 856.5 Book value (RM/share) 0.70 P/BV (x) 2.1 ROE (%) 23.1 Net Gearing (%) net cash Major Shareholders Hock Seng Lee Enterprise (54.1%) EPF (9.4%) Free Float (%) 20.5 Avg Daily Value (RM mil) 0.6 Price performance 3mth 6mth 12mth Absolute (%) -6.3 +19.9-11.5 Relative (%) -5.2 +11.7-12.1 The valuation is supported by net cash of 40 sen/share. We maintain our RNAV for its 890acre landbank at 65 sen/share. HSL s 1QFY12 results were below expectations, with a net profit of RM19.6mil (-25% QoQ; +11% YoY) accounting for only 18% of our forecast for FY12F, and 20% of consensus. As expected, no interim dividend was declared. The construction division accounted for only 17% of our forecast s turnover for that segment, while property development did better at 30%. EBITDA margin was maintained at 19% vs. a year earlier, but down over 3ppts from the previous quarter. EBITDA of RM26.9mil represented only 17% of our forecast. As such, we are maintaining our overall EBITDA margin assumption at 18%, but have lowered our turnover projections and earnings for FY12F by about 16% each, to account for most of the new jobs that may only be secured in the second half of the year. We maintain our annual new order book assumption at RM600mil for FY12F-FY14F. Year-to-date, HSL has secured RM155mil of projects. From our channels checks, we believe many of the announcements on the award of SCORE and other infrastructure jobs may only be made in 2H12 possibly pending the General Election and thereafter. HSL currently has RM1.7bil worth of jobs in hand, of which RM1.0bil is outstanding with plenty more projects within Sarawak s SCORE up for grabs, particularly in infrastructure and marine engineering works. Potential jobs in the pipeline are:- 1) The remaining RM1.7bil packages of the Kuching central sewerage system; 2) the construction of the Samalaju port; 3) participation in the construction of power-related plants and ancillary jobs; and various roads, water, flood mitigation and other infrastructure projects. As it stands, HSL has been deeply involved in various projects in Sarawak s economic growth nodes, including Samalaju, Mukah and Tanjung Manis. The stock is currently trading at an undemanding FY12F-FY14F PEs of 6x-9x. PP 12247/06/2013(032380)
TABLE 1: RESULTS SUMMARY FY Dec 31 1QFY12 4QFY11 1QFY11 QoQ % Change YoY % Revenue (RM mil) 139.2 158.6 123.6 (12.2) 12.6 Net operating costs -112.3-122.6-99.0 (8.4) 13.5 EBITDA 26.9 36.0 24.7 (25.2) 9.2 EBIT 24.8 34.1 22.6 (27.3) 9.7 Net profit (RM mil) 19.6 26.1 17.7 (25.0) 10.9 EPS 3.6 4.8 3.2 (24.8) 12.2 Gross DPS (sen) 0.0 2.4 0.0 (100.0) n/a Revenue - construction 133.5 154.5 117.6 (13.5) 13.6 - property 5.7 4.1 6.1 36.8 (6.7) Total 139.2 158.6 123.6 (12.2) 12.6 EBITDA - construction 25.1 34.3 22.6 (26.9) 10.8 - property 1.8 1.7 2.0 9.8 (9.1) Total 26.9 36.0 24.7 (25.2) 9.2 EBIT - construction 23.0 32.4 20.6 (29.2) 11.5 - property 1.8 1.7 2.0 9.9 (9.3) Total 24.8 34.1 22.6 (27.3) 9.7 Margins EBITDA (%) 4QFY11 3QFY11 4QFY10 QoQ ppt YoY ppt - construction 18.8 22.2 19.2 (3.4) (0.5) - property 32.5 40.5 33.4 (8.0) (0.9) EBIT (%) - construction 17.2 21.0 17.5 (3.8) (0.3) - property 32.3 40.2 33.2 (7.9) (0.9) Source: Company, AmResearch AmResearch Sdn Bhd 2
TABLE 2: ESTIMATED TOTAL VALUE OF CONTRACTS IN HAND Projects Start End Value (RM mil) Infra works: Kuching sewerage project 3Q08 2Q14 452.0 Infra works: Sibu Flood Mitigation, phase 1 2Q09 2Q12 136.0 Building works: Affordable housing, Bintulu 2Q09 2Q12 126.0 Road works: Sebauh, Bintulu 4Q09 2Q12 15.0 Buildings works: SMK School Project 1Q10 3Q12 68.0 Road Works: Lubok Antu/Lemanak/Engkari, Sri Aman 1Q10 2Q12 29.0 Building works: Educational Institution Samarahan 1Q10 2Q12 42.0 Building works: Muara Tebas 1Q10 1Q12 11.0 Road works: Technology Park to Kpg. Tanjong Bako 2Q10 4Q12 72.0 Road works: Halal Park, Tg Manis 3Q10 3Q12 46.0 Infra works: Palm Oil Industrial Cluster (POIC) 4Q10 4Q12 77.0 Road works: Gedong-Simunjan Road, Samarahan 4Q10 1Q13 99.0 Road works: Tuie/Supa/Manggut, Betong 4Q10 2Q13 67.3 Civil works: Earthworks in Samarahan Industrial Estate 1Q11 3Q12 16.2 Road works: Flyover in Kuching 1Q11 1Q13 49.0 Road works: Tatau/Balingian, Mukah 2Q11 4Q12 30.0 Infra works: Rural Water supply Sibu 3Q11 3Q12 45.7 Infra works: Samalaju water supply 4Q11 2Q13 90.3 Infra works: Road works, Mukah division 4Q11 4Q12 9.0 Infra works: Road works, Saribas 4Q11 2Q15 49.0 Infra works: Road works, Balingian-Jln Persekutan, Sibu/Bintulu 1Q12 1Q14 82.2 Infra works: Sibu Flood Mitigation phase 2 2Q12 2Q14 45.7 Civil works: Bintulu Orphanage Complex 2Q12 2Q13 10.6 Civil works: Bintulu government science facility 2Q12 2Q14 16.9 Total 1,685 Total outstanding Source: Company / AmResearch RM1.0bil AmResearch Sdn Bhd 3
TABLE 3: FINANCIAL DATA Income Statement (RM mil, YE Dec) 2010 2011 2012F 2013F 2014F Revenue 488.3 581.5 677.1 810.8 877.4 EBITDA 103.9 121.0 124.4 164.6 176.4 Depreciation (7.6) (8.3) (9.1) (10.5) (12.0) Operating income (EBIT) 96.3 112.7 115.3 154.1 164.4 Other income & associates 0.0 0.0 0.0 0.0 1.0 Net interest 2.1 3.9 6.3 8.2 9.0 Exceptional items 0.0 0.0 0.0 0.0 0.0 Pretax profit 98.4 116.6 121.6 162.3 173.4 Taxation (25.0) (29.3) (30.4) (40.6) (43.4) Minorities/pref dividends (0.0) 0.0 (0.3) (0.6) (0.3) Net profit 73.4 87.3 90.9 121.1 129.7 Core net profit 73.4 87.3 90.9 121.1 129.7 Balance Sheet (RM mil, YE Dec) 2010 2011 2012F 2013F 2014F Fixed assets 183.5 206.7 241.1 280.1 321.0 Intangible assets 0.0 0.0 0.0 0.0 0.0 Other long-term assets 0.0 0.0 0.0 0.0 0.0 Total non-current assets 183.5 206.7 241.1 280.1 321.0 Cash & equivalent 89.7 183.7 233.0 288.7 356.7 Stock 13.1 23.2 22.7 26.6 28.8 Trade debtors 268.7 241.7 281.4 336.9 364.6 Other current assets 27.0 27.8 27.8 27.8 27.8 Total current assets 398.5 476.5 564.9 680.1 778.0 Trade creditors 217.3 249.7 299.6 350.4 380.1 Short-term borrowings - - - - - Other current liabilities 5.4 8.0 6.6 6.6 6.6 Total current liabilities 222.7 257.8 306.3 357.0 386.7 Long-term borrowings - - - - - Other long-term liabilities 14.1 15.9 15.9 15.9 15.9 Total long-term liabilities 14.1 15.9 15.9 15.9 15.9 Shareholders funds 345.0 409.3 481.9 584.6 693.4 Minority interests 0.2 0.2 2.0 2.6 2.9 BV/share (RM) 0.59 0.70 0.83 1.00 1.19 Cash Flow (RM mil, YE Dec) 2010 2011 2012F 2013F 2014F Pretax profit 98.4 116.6 121.6 162.3 173.4 Depreciation 7.6 8.3 9.1 10.5 12.0 Net in working capital 2.8 49.3 10.8 (8.7) (0.2) Others (54.8) (38.0) (36.7) (48.8) (52.4) Cash flow from operations 54.1 136.1 104.7 115.3 132.8 Capital expenditure (23.0) (17.4) (43.5) (49.4) (52.9) Net investments & sale of fixed assets (0.8) (1.2) 0.0 0.0 0.0 Others 2.3 (0.0) 6.3 8.2 9.0 Cash flow from investing (21.5) (18.6) (37.2) (41.2) (43.9) Debt raised/(repaid) (0.4) (0.5) - - - Equity raised/(repaid) 2.0 3.0 4.0 5.0 6.0 Dividends paid (10.7) (12.4) (18.2) (18.4) (20.9) Others 5.3 0.5 0.0 0.0 0.0 Cash flow from financing (3.8) (9.4) (14.2) (13.4) (14.9) Net cash flow 13.3 94.5 49.3 55.7 68.0 Net cash/(debt) b/f 75.9 89.3 183.7 233.0 288.7 Net cash/(debt) c/f 89.3 183.7 233.0 288.7 356.7 Key Ratios (YE Dec) 2010 2011 2012F 2013F 2014F Revenue growth (%) 30.2 19.1 16.4 19.8 8.2 EBITDA growth (%) 30.7 16.4 2.8 32.3 7.2 Pretax margins (%) 20.2 20.1 18.0 20.0 19.8 Net profit margins (%) 15.0 15.0 13.4 14.9 14.8 Interest cover (x) n/m n/m n/m n/m n/m Effective tax rate (%) 25.4 25.2 25.0 25.0 25.0 Net dividend payout (%) 16.8 17.0 20.3 17.3 18.1 Debtors turnover (days) 201 152 152 152 152 Stock turnover (days) 12 18 15 15 15 Creditors turnover (days) 206 198 198 198 198 Source: Hock Seng Lee, AmResearch estimates AmResearch Sdn Bhd 4
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