- We maintain BUY on Hock Seng Lee Bhd (HSL), with an unchanged SOP fair value of RM2.30/share, following its 1QFY15 result.

- HSL’s 1QFY15 net profit came in at RM19.6mil (-2.7% QoQ, +19.7% YoY) – accounting for 21%-22% of our and consensus estimates, respectively.

- We deem the result to be in line with expectations. Its 1Q is traditional the weakest quarter, given the lunar New Year festival and the rainy season.

- No dividend was declared. It traditionally declares semiannual dividends at the half-year and final quarter marks.

- Construction margins improved slightly QoQ, but pressure remained amid the “predominance of open tender procurement and the general rise across all our operating costs.”

- In a statement, HSL also said Sarawak’s construction industry was being impacted by inflationary pressures and a shortage of labour shortage.

- For now, we maintain our construction EBITDA margin assumption at 18%. As at end-March 2015, HSL had an outstanding order of RM870mil, 1.4x its FY14 revenue of RM605mil.

- The group secured RM105mil worth of new projects in 1QFY15, including an access road and water intake project in the SCORE knowledge hub of Mukah.

- Notably, in 1QFY15, HSL completed the construction of the RM452mil first phase of the Kuching central sewerage system.

- The state has yet to award the remaining phases, which could have a total contract value of another RM3.5bil. We believe HSL remains as the frontrunner to undertake the remaining phases.

- We maintain our annual new order assumption at RM600mil. The risks include a failure to secure the 2nd phase of the Kuching central sewerage project (estimated at RM500mil) and slowdown in construction jobs amid a depleting order book.

- The bulk of its outstanding order will be completed over FY15F-FY16F. HSL continues to expect to participate in the RM27bil upgrading of the Pan-Borneo Highway and the state’s rural development agenda.

- Maintain Buy.

Source: AmeSecurities Research - 22 May 2015