- We maintain BUY on Hock Seng Lee Bhd (HSL), with a lower SOP fair value of RM2.30/share (vs. RM2.40/share previously), following its FY14 result.

- We now peg the construction division’s downward revised 3-year average earnings to a PE of 9x vs. 7x previously. We have cut FY15F and FY16F earnings by 24% and 22%, respectively, following downward adjustments of margins.

- HSL’s 4QFY14 net profit came in at RM20mil (-6% QoQ, -9% YoY), bringing the full year total to RM77mil (-10% YoY) – accounting for only 66% and 89% of our and consensus estimates, respectively.

- It declared a single-tier interim dividend of 1.6 sen/share, bringing the total for the year to 2.8 sen/share (vs. 3.4 sen/share in FY13).

- As at end-December, HSL had an outstanding order of RM950mil (which will last for two years), 1.7x its FY14 construction revenue of RM573mil (+14.4% YoY).

- The division was hurt by lower margins in the final quarter, stemming from projects secured via open tenders and a general increase in construction cost. We have cut our construction EBITDA margin assumption to 18% from 21% previously.

- HSL last year secured RM302mil worth of new orders (halved from FY13’s RM628mil) vs. our assumption of RM600mil, in the absence of awards of major jobs.

- We maintain our annual job replenishment at RM600mil in the belief that it is likely to secure the second phase of the RM4bil Kuching central sewerage system project, which would be valued at least RM500mil.

- The property division is still a small portion of the group’s activities, accounting for only 5% of group revenue and 10% of its operating profit.

- Property margin in FY14 was at a good 32%. We have cut our assumption to 33% from 35% previously.

- The bulk of its outstanding order will be completed over FY15F-FY16F, and the award of the 2nd phase of the central sewerage project will strengthen its prospects and be a strong catalyst to share price upsides.

- Ex-cash, HSL is trading at an undemanding PE of 10x and 9x for FY15F and FY16F, respectively.

Source: AmeSecurities