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PublicInvest Research

Author: PublicInvest   |   Latest post: Wed, 19 Jun 2019, 11:29 AM

 

Hock Seng Lee Berhad - Within Expectations

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Hock Seng Lee (HSL) reported 1QFY19 revenue of RM146.7m, higher by 11.4% YoY. The performance was attributed to healthy growth in both construction and property division which saw growths of 10.0% and 20.6% YoY respectively. Despite the stronger revenue growth, HSL only reported a 2.0% growth in its net profit to RM14.1m as profit margins were lower with gross and pre-tax profit margin at 14.8% and 12.8% respectively (1QFY18: 17.1% and 14.1%) mainly due to changes in product mix with an increase in progress billings of low margin infrastructure projects. We deem the profit as in line with our and consensus expectations, accounting for 20.5% and 21.2% of full-year estimates respectively, and maintain our FY19-21 forecasts in anticipation of better contributions in the remaining quarters underpinned by a pick-up in construction progress from its RM2.5bn unbilled orderbook. We maintain our Neutral call, with TP of RM1.45, pegged at c.10x PER to our FY20 EPS of 13.4sen.

  • QoQ performance. HSL recorded slightly lower revenue of RM146.7m (-2.9% QoQ) in 1QFY19, mainly due to lower recognition from property division by 24.5% QoQ as some of the projects (such as Eden Commercial Centre shop houses and industrial buildings for Vista Industrial Park Block 1) were completed last year. This was partly offset by a 2.1% growth in the construction division. Margins improved slightly this current quarter with pre-tax profit margin of 12.8% (4QFY18: 10.1%) to lower administrative expenses and higher interest income.
  • Profit margins to remain at current level, ranging from 13.7% - 14.5% at gross level as the bulk of its balance orderbook is from low margin infrastructure projects which carry a margin of about 10% - 12%. This explains the -8.6% YoY contraction in its construction division’s pretax profit despite reporting a 10% topline growth.
  • Healthy outstanding orderbook at RM2.5bn translating to c. 4.8x of FY18 construction revenue, will underpin earnings visibility. To date, HSL has secured 2 contracts, with the latest awarded by JKR Sarawak for a project under the Sarawak Coastal Road worth RM299m. With this, HSL has successfully replenished a total of RM353.3m worth of projects this year. As for the property division, there is RM340m worth of projects that are currently ongoing. The Group is expected to launch approx. RM100m worth of new properties this year.

Source: PublicInvest Research - 24 May 2019

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