- The Kumpulan Nishimatsu-Hock Seng Lee (KNH) consortium is in the final stages of negotiations with the Sarawak state authorities for package 2 of the Kuching centralised wastewater management system, according to StarBiz.

- The consortium is now at the tail-end of completing the RM530mil package 1, which started in October 2008. As at 31 March, 2014, about 92.6% of package 1 had been completed. HSL corporate affairs director Sonja Gan told StarBiz that ongoing negotiations between the consortium and the state authorities could be wrapped up soon, with an outcome expected in the next few months.

- Package 1 is made up of three key components – a wastewater treatment plant, a sewer network (overall length of 64.5km consisting of trunk, secondary and tertiary sewer) and property connections. Phase 2 is expected to cost ~RM700mil-RM800mil.

- According to StarBiz, the total number of properties to be connected under package 1 is around 2,830. Some 40,000 population equivalent (PE) has been connected to date. Around 100 individual properties have been connected and another 100 are in progress (out of the total 782). Package 1 is running on time for completion in early 2015.

- The consortium has invested ~RM30mil, including in a laser-guided tunnel boring machine fleet. StarBiz reported the 3-phase project was originally estimated to cost RM2.5bil by the state authorities.

- The treatment plant could cater to 67,000 PE under package 1 and would increase to its designed capacity of 100,000 PE if package 2 goes ahead. The plant can be expanded to a capacity of 400,000 PE.

- We maintain our new order assumption of RM600mil for the year (vs. RM525mil recorded in FY12) as well as our forecasts numbers. We remain optimistic about HSL’s prospects over the next 2-3 years, given plenty of job opportunities within and without Sarawak’s SCORE. We continue to like HSL for:- a) the strong earnings visibility; b) its healthy balance sheet, and being debt-free; and c) as a proxy to the strong growth in the state’s construction sector.

- Valuations are attractive, with the stock currently trading at only 8x-9x PE for FY14F-FY16F. We maintain BUY on Hock Seng Lee Bhd (HSL), with an unchanged SOP fair value of RM2.40/share.

Source: AmeSecurities