- We maintain BUY on Hock Seng Lee Bhd (HSL), with a sum-of-parts fair value of RM2.48/share, which includes a PE of 8x against its 3-year average forward earnings for its construction division. The valuation is supported by net cash of 44 sen/share (FY13F) and RNAV for its 890 acrelandbank at 65 sen/share.

- At the mid-day break, HSL announced a 1QFY13 net profit of RM19.5mil (-0.5% YoY; -24.8% QoQ), which was slightly below expectations – accounting for 19% and 20% of our and consensus forecasts, respectively.

- Nonetheless, we expect more jobs ahead to make up for the shortfall in 1QFY13, and the quarters ahead to show better results, particularly in the second half. As expected, no dividend was announced. Traditionally, HSL declares semi-annual dividends.

- As at 31 March, 2013, it still had RM1.05bil worth of outstanding jobs, out of a total of RM1.8bil projects in hand. We maintain our earnings forecasts for FY13F-FY15F and a new job assumption of RM600mil per annum.

- YTD, it has secured only RM153mil worth of new contracts. However, we remain confident that HSL will be able to easily exceed the RM525mil worth of jobs secured last year, as contract flows could start to build momentum within the next two months.

- In-line with market expectations, we believe the state administration, following GE13, has started to refocus on the much-needed infrastructure development within Sarawak’s economic corridor SCORE, as well as out of it.

- In 1QFY13, construction activities remained as the group’s mainstay, accounting for 94% and 91% of turnover and EBITDA, while property development accounted for the rest. Overall group EBITDA margin stayed at a high 20% (vs. our forecast of 21%).

- In a statement accompanying the 1Q result, HSL said there is likely to be more projects in the three SCORE growth node towns of Tanjung Manis, Mukah and Samalaju.

- HSL’s largest project is the Kuching City Centralised Wastewater Management project (Package 1), which is in the final property connections phase. Looking ahead, it will be bidding for the remaining phases of the long-term project (with ~RM1.7bil yet to be awarded).

- We continue to like HSL for its:- 1) strong earnings visibility, 2) strong balance sheet, including RM200mil cash and cash equivalents, and 3) as a proxy to the strong growth in the state’s construction sector.

Source: AmeSecurities