PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 22 Oct 2021, 11:22 AM


Hock Seng Lee Berhad - Productivity Dragged by MCO

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Hock Seng Lee (HSL) has shown a marked improvement in its 2QFY21 results with core net profit rising by 120.6% YoY to RM8.8m, mainly driven by the resumption of construction activities and low base effect from last year’s total closure during MCO1.0 This was supported by the Group’s two key segments, construction and property’s PBT which grew by 130% and 80% YoY to RM7.0m and RM4.2m respectively. For 1HFY21, we deem the earnings of RM17.9m (+54.6%YoY) is within our and consensus expectations, accounting for c.39% and 41% of full-year earnings as we expect FY21 to be a back-loaded year. Nonetheless, on a QoQ basis, 2QFY21 earnings declined marginally by -3.8% as productivity was being dragged by high Covid-19 cases and supply chain constraints, thus limiting its operational efficiency and hence affecting its progress billings slightly. We foresee the group showing better earnings recovery prospects particularly in 2HFY21 onwards, underpinned by progressive billings from its outstanding orderbook of RM1.7bn, and sales from its property segment, premised on the country achieving its herd immunity objective. We maintain our Neutral call with an unchanged TP of RM0.96, as we peg FY22 EPS to an unchanged PE multiple of 11x, which is about the group’s 2-year historical average.

  • QoQ results highlight. HSL reported a sequential decline in 2QFY21 net profit to RM8.8m (-3.8% QoQ), despite a higher decline of 10.5% in revenue to RM142.8m. This was mainly attributable to lower level of construction activities during the lockdown and adherence to Covid-19 SOP in 2QFY21. In addition, work momentum that had just picked-up in 1QFY21 was interrupted by the re-imposition of new variations of movement control orders in most parts of Malaysia. However, profit margins were surprisingly resilient, improving by +0.4ppts QoQ to 6.1%, primarily due to lower cost of sales (-11.2% QoQ).
  • Orderbook. We estimate that HSL’s orderbook stands at RM1.7bn, translating to a 3.2x coverage ratio based on FY20 revenue. It recently secured its first notable contract win in 2021 worth around RM130.7m from Yayasan Sarawak. Our FY21 orderbook replenishment assumptions are RM350m. With the development focus in East Malaysia, orderbook replenishment remains upbeat.
  • Outlook. Covid-19 remains a great challenge, presenting many uncertainties. Although sector GDP is forecasted to record a positive growth this year as opposed to a contraction in 2020, project execution remains as a key issue given the high infection rates and fatalities currently. Nonetheless, with a higher workers vaccination rate and the resumption of construction and property activities, we anticipate earnings recovery to be stronger in 2HFY21.

Source: PublicInvest Research - 24 Sept 2021

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Chart Stock Name Last Change Volume 
HSL 1.00 -0.03 (2.91%) 181,800 

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