-  We maintain BUY on Hock Seng Lee Bhd (HSL), with a sumof-parts fair value of RM2.48/share, which includes a PE of 8x against its 3-year average forward earnings for its construction division.

-  We came away convinced from a visit to Sarawak last week that HSL will continue to benefit from the infrastructure development within and outside the Sarawak Corridor of Renewable Energy (SCORE).

-  Crucially, we learned that marine- and water-related specialist HSL has presented to the state Cabinet its proposals for the second phase of the Kuching central wastewater management project, which extends the geographical reach of the system. The cost of the second phase is estimated at RM700mil-RM800mil.

-  We believe the package could be awarded by early next year, along with the O&M of the wastewater treatment plant. Phase 1 is now 75% completed, with the bulk of the remaining works revolving around connecting the central networks to the residential and commercial units.

-  The contract value for the second phase alone would surpass our annual new order assumption of RM600mil for the next two years. Additionally, the rapid development in Sarawak also necessitates the implementation of central sewerage systems as well as flood mitigation programmes in other cities and towns. Apart from numerous water supplyrelated jobs in the state that are in urgent need of implementation, other potential major jobs include:-

-  1) The Balingian power plant: HSL’s is one of two consortia still in the running. It has been reported that the plant could cost RM2.5bil. HSL could benefit from RM300mil-RM400mil worth of ancillary jobs. We understand from Sarawak Energy Bhd that the project could be awarded by year-end or early next year, pending finalisation of the coal supply contract.

-  2) The RM300mil-RM400mil proposed Mukah (a SCORE growth node) new airport: The tender for the RM150mil phase one (earthworks and land reclamation) has closed. Phases two and three involve the construction of the runway and terminal building.

-  3) The development of the halal hub in Tanjung Manis: We understand the state’s Regional Economic Corridor Development Authority (Recoda) is in the final stages of finalising the masterplan for Tanjung Manis, another SCORE growth node. HSL is the pioneer developer of the infrastructure there.

-  We continue to like HSL for its:- a) strong earnings visibility; b) strong balance sheet, including RM200mil cash and cash equivalents, and being debt-free; and c) as a proxy to the state’s development agenda.

Source: AmeSecurities