Investment Highlights

• We maintain our forecast, BUY call and FV of Hock Seng Lee (HSL) of RM2.15 based on 15x FY18F EPS of 14.3 sen, which is in line with our 1-year forward target PE of 13-15x for mid-cap construction stocks.

• HSL’s 1QFY17 net profit came in at only 18% and 15% of our and consensus full-year forecasts respectively. However, we consider the results within expectations as we expect stronger quarter ahead with key construction projects gathering momentum.

• 1QFY17 PBT declined 30% YoY and 4% QoQ to RM15mil as compared to RM21.5mil for 1QFY16 and RM15.7mil in 4QFY16 due to:

1. Early stages of construction projects – Construction works for the Pan Borneo Highway and sewerage plants in Kuching and Miri were still in initial stages of execution.
2. Property sector remained soft – Revenue slipped by 34% YoY and 3% QoQ due to the continued weakness in the property market in Kuching. Also, margins were squeezed due to higher costs and product mix which skewed towards the low-margin types.

• We believe HSL's prospects remain strong. It has successfully added RM346mil of new job wins in 1QFY17, boosting its order book to a record high of RM2.8bil, with RM2.4bil unbilled.

• Its FY17 top-line visibility is strong as a number of smaller projects are accelerating towards completion, particularly infrastructure and building works in SCORE region, while mega projects like Pan Borneo Highway and sewerage plants are gaining momentum. HSL hopes to boost property sales in FY17 via the offering of a variety of commercial, industrial and residential products.

• We continue to like HSL because: 1) Its strong outstanding order book of RM2.8bil that will keep it busy over the next 3-4 years; and 2) Its strong earnings visibility over the long term with the continued flow of civil and marine engineering and construction works from massive infrastructure developments such as roads (anchored by the RM16bil Pan Borneo Sarawak Highway and the RM12.8bil Pan Borneo Sabah Highway), ports, hydro power plants and water/wastewater treatment facilities.

Source: AmInvest Research - 26 May 2017