Hock  Seng  Lee  (HSL)'s  9MFY12  net  profit  of  RM64.8m  was  below  our  and consensus forecasts at 64.7% and 68.8% of both estimates respectively, owing to slower-than-expected construction billings in 3Q.  Thus, we are trimming our FY12 EPS by 11.7% while lowering our FY13 and FY14 EPS marginally by 5.3% and 2.2% respectively  to  factor  in  lower  margins  from  its  property  unit.  That  said,  we  stilllike HSL's prospects as it has secured  RM512m  in  new  jobs  YTD,  boosting  its outstanding orderbook to an estimated RM1.20bn. Maintain BUY, but at a revised FV of RM2.10, based on an unchanged 12x FY13 PER.

Dragged down by slower billings. HSL's 9MFY12 revenue of RM443.2m (+4.8% y-o-y) and core earnings of RM64.8m (+6.0% y-o-y) were driven by higher contribution from its  construction  segment,  which  helped  to  offset  the  shortfall  from  its  property  division due  to  weaker  margins.  Nonetheless,  the  overall  numbers  fell  short  of  our  and  street expectations  as  it  recognized  lower-than-expected  construction  billings  during  the quarter  under  review  after  some  projects  were  completed,  with  its  newly  secured  jobs totaling RM512m YTD yet to take off. On a quarterly basis, its 3QFY12 revenue came in at RM152.2m while core earnings amounted to RM22.7m, with both improving by 0.3%-1.2% y-o-y and q-o-q.

Revisiting forecasts. Taking the YTD earnings underperformance into account, we are revisiting our model and trimming our FY12 earnings forecast by 11.7% as management has highlighted that the current rainy season in 4QFY12 might impede  efforts to kick off its recently secured projects. On top of this, we are also cutting our FY13 and FY14 core earnings estimates by some 5.3% and 2.2% respectively, adopting a cautious approach in view of the increasingly gloomy outlook for the property market and factoring in lower sales and profit margin contributions from its property division.    

BUY.  Despite  the  earnings  disappointment,  which  we  deem  temporary  in  nature,  we continue  to  like  HSL's inexpensive  valuation,  RM1.20bn-strong  construction  orderbook and sturdy financials, boasting an end-FY12 target net cash per share of RM0.34. That said,  we  do  not  discount  the  possibility  of  management  distributing  the  25.9m  treasury shares it now holds to spur investor interest. Hence, we are reiterating our BUY call on HSL,  with  our  FV  revised  marginally  to  RM2.10,  based  on  an  unchanged  12x  FY13 PER.

Source: OSK