- We maintain BUY on Hock Seng Lee Bhd (HSL), with a sum-ofparts fair value of RM2.59/share, which includes a PE of 9x against its 3-year average forward earnings for its construction division. The valuation is supported by net cash of 40 sen/share and RNAV for its 890acre-landbank at 65 sen/share.
- HSL today announced the securing of a RM291mil contract for the construction of a UiTM new campus in Mukah, Sarawak. It signed the agreement with concessionaire KP Mukah Development Sdn Bhd yesterday for the design, construction, and commissioning of the campus facilities.
- Following this, its year-to-date new orders have been bumped up to about RM472mil, well surpassing that of RM313 million for the whole of last year. Of the more than RM2.0bil worth of jobs (including the new UiTM job) currently in hand, over RM1.3bil remains outstanding.
- We maintain our annual new order book assumption at RM600mil for FY12F-FY14F. For FY12F, that would very likely be achieved, if not exceeded. We also maintain our overall group EBITDA margin assumption at 18%.
- The scope of works includes sand filling, piling, civil infrastructure, buildings, and mechanical and electrical works. The construction will take 36 months, for completion by 3Q2015. HSL said with the low-lying terrain and inclusion of a substantial lake as a scenic feature of the campus, it would will draw on its marine engineering expertise.
- HSL's winning the UiTM contract is not a surprise, as we had expected the company to secure the job, which is part of our new job assumption for the year. HSL said the UiTM Mukah project will be only the second of its kind in Sarawak to be implemented under the Private Financing Initiative concept; the first having been located in Samarahan, Sarawak.
- The setting up of the UiTM branch campus is for the development of human capital to complement the fast-paced development of the Sarawak Corridor of Renewable Energy (SCORE). The campus will covers about 64 acres, with walkways and five blocks of five-storey apartments for live-in accommodation.
- Potential jobs in the pipeline are:- 1) The remaining RM1.7bil packages of the Kuching central sewerage system; 2) the construction of the new permanent Samalaju port; 3) participation in the construction of power-related plants and ancillary jobs; and various roads, water, flood mitigation and other infrastructure projects.
- The stock is currently trading at an undemanding FY12F-FY14F PEs of 7x-10x. We reiterate our BUY call for its clear earnings visibility, strong balance sheet with RM200mil of cash reserves, and as a proxy to the strong growth in the state's construction sector.