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Author: PublicInvest   |   Latest post: Fri, 6 Dec 2019, 9:18 AM

 

HOCK SENG LEE BERHAD - Below Estimates

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Hock Seng Lee (HSL) reported 3QFY19 top and bottom-line growth of 0.3% and 1.7% respectively on a YoY basis, though lower by 0.9% and 11.4% QoQ to RM173.8m and RM14.6m respectively. For 9MFY19, HSL reported an increase in net profit by 6.7% to RM45.1m in tandem with higher revenue of 8% to RM496m. The results were below our and consensus expectations, accounting for only 69.3% and 71.1% of full-year estimates. Deviation for this quarter was due to weaker recognition and profit margins from the construction division. HSL’s net profit margin is still above 9% as of 9MFY19 however, though we adjust our FY19-21 forecast lower by an average of 11.3% to better reflect construction progress billings for the projects in hand. The Group’s unbilled orderbook remains healthy, standing at RM2.5bn. We maintain our Outperform rating with an adjusted TP of RM1.45 (RM1.62 previously), based on its 5-year average PER of c.11x over our FY20 EPS of 13.1sen.

  • Results highlight. 9MFY19 revenue and net profit grew 8.0% and 6.7%, with growth mostly supported by the Group’s property division which grew by 29.3% and 8.0% respectively at the top and bottom line levels. HSL’s net profit margin for 9MFY19 contracted to 9.1% as opposed to 9.5% in 1H due to lower contribution from its construction division amid lower billings achieved in the current quarter.
  • Weaker contribution from the construction segment QoQ. The segment’s pre-tax profit was exacerbated further after it reported lower margin of 2.1ppt QoQ due to execution of low margin infrastructure projects as well as higher start-up costs for the new projects, in our view, depressing its pre-tax profit by 21.8% QoQ to RM11.7m. It was softened by the 18.1% QoQ growth in the property segment, as margins expanded by 4.6ppt in the current quarter.
  • Healthy unbilled orderbook in hand. Based on our records, HSL’s YTD wins is about RM482.5.8m. We understand that the Group has also won some other smaller-sized projects in building, bridge construction and others with a combined value of c. RM200m. In total, we estimate the Group has successfully replenished its orderbook by around RM700m this year. With that, the outstanding orderbook currently remains healthy at RM2.5bn, translating to c. 4.8x of FY18 construction revenue.

Source: PublicInvest Research - 19 Nov 2019

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