- We maintain BUY on Hock Seng Lee Bhd (HSL), with an unchanged SOP fair value of RM2.40/share.

- HSL posted an FY13 net profit of RM85mil (-6% YoY) – which we deem to be within expectations, coming in at ~95% of our and consensus forecasts. The 5% variance came mainly from a lower net interest amount of RM4.8mil vs. our forecast of RM7.2mil (-34%).

- Operating performance was in line with expectations, with revenue and profits all within 2%-3% of our and consensus forecasts.

- HSL declared a single-tier final dividend of 1.8 sen/share, bringing the total to 3.4 sen/share – for a yield of 2% and payout ratio of ~20% vs. 23% in FY12. We had anticipated a total dividend of 4.6 sen/share. The eventual payout equates to the same net cash dividend return for 2012.

- It expects progress claims on new contracts to pick up as schedules reach more active stages. During FY13, progress and start-ups on some sites was slower than expected due “unseasonal high rainfall” and “delays in mobilisation or adverse site conditions.”

- Construction margins were maintained at the 19%-21% level, and property margins at 33%-34%. Construction accounted for 91% of total turnover (vs. 95% in FY12) and 86% of EBITDA (vs. 94% in FY12) – reflecting a rise in contributions from the property segment. It contributed 15% (vs. 7% in FY12) to the bottom line.

- Significantly, HSL secured RM628mil (+20% YoY) worth of new jobs last year – surpassing our assumption of RM600mil and second only to the >RM900mil achieved in FY08 on the back of the RM452mil Kuching sewerage job.

- Its current order book involves RM2.1bil worth of external (90%) and internal (10%) jobs. It still has an outstanding order book of RM1.1bil-RM1.2bil, ~2x its FY13 revenue.

- Apart from the next package of Kuching’s sewerage system, it is vying for airport extensions, roads and bridges, power plants, mass reclamation works, flood mitigation, water supply, affordable housing and other building construction contracts.

- Potential major jobs include:- (i) the RM2.5bil Balingian power plant: HSL could benefit from RM300mil-RM400mil worth of ancillary jobs; (ii) the RM300mil-RM400mil proposed Mukah new airport; and (iii) the development of the halal hub in Tanjung Manis. HSL is the pioneer developer of the infrastructure there.

Source: AmeSecurities