Hock Seng Lee Berhad - Back to Losses

Date: 30/11/2018

Source  :  PUBLIC BANK
Stock  :  HSL       Price Target  :  1.21      |      Price Call  :  HOLD
        Last Price  :  1.34      |      Upside/Downside  :  -0.13 (9.70%)

Hock Seng Lee’s (HSL) 9MFY18 revenue of RM459.3m (+66.5% YTD) came in line with our expectation at 70.4% of our full-year estimates, attributed to strong billings contribution from the construction segment as most of the projects in hand like the Pan-Borneo Highway, Package 2 of Kuching’s Centralized Wastewater Management System and a wastewater project for Miri are currently at advanced stages. In tandem with solid revenue growth, the Group’s net profit surged by 32.7% YTD but coming in below our forecast however, accounting for only 60%. The discrepancy was mainly due to higher costs recognized during the period with gross profit margin dropping by 4.2 ppt to 14.7% mainly due change of product mix. Our FY18 - FY20 earnings forecasts are subsequently reduced by an average 19% to account for lower margins. On a positive note, earnings growth is expected remain healthy with average 3 years growth of 22% underpinned by its construction revenue from an RM2.4bn balance orderbook in hand. We maintain our Neutral call nonetheless, with revised TP of RM1.21, pegged at c.9x PER to our FY19 EPS of 13.4sen.

  • QoQ improves. HSL recorded 3QFY18 revenue of RM173.3m (+12.4% QoQ) with the construction segment contributing RM150.2m or 87% whilst the property development segment registered a contribution of RM23.1m or 13% to the Group’s revenue during the quarter. Net profit only increased by a slight 1.6% to RM14.3m, as gross profit margin slipped 0.6ppt due to increased progress billings on low margin infrastructure projects.
  • Healthy outstanding orderbook. As at 30 September 2018, HSL had a balance orderbook of RM2.4bn, or c.4.3x of FY17 construction revenue, having added some RM157m in new projects over the 9MFY18 period. Notable new contracts include building works for Petronas’s training institute. Meanwhile, the property division has sustained its strong performance and is looking to complete several phases of its top-selling residential developments at Samariang Aman 2 and La Promenade as well as industrial units at the Vista Industrial Park (VIP) by year-end.
  • Earnings forecast. We revised our FY18/19/20 earnings forecast lower by 18.8%/19.8%/18.3% respectively following its lower-than expected 9MFY18 net profit, largely on lowered profit margin assumptions. We see margins remaining at current levels, ranging from 13.7% - 14.5% at gross level as bulk of the balance orderbook is from low-margin infrastructure projects which carry a margin of about 10% - 12%. Nevertheless, we foresee earnings growth remaining healthy with 3 years average growth of 22% underpinned by construction billings from its RM2.4bn balance orderbook in hand.

Source: PublicInvest Research - 30 Nov 2018

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