News  Hock Seng Lee (HSL) announced that it has clinched an infrastructure works project at the Samalaju Industrial Park, Bintulu, Sarawak. The project valued at RM73.7m and is due to be completed by 1Q16. The scope of works includes pilling, earthworks, drainage, pavement, sewerage station system and related mechanical and electrical works.

Comments  This is the first major contract for HSL in 2014. The contract sum of RM73.7m is on-track with our FY14 total new orderbook assumption of RM600m. In fact, according to the management, year-to-date, including this contract, HSL has already secured RM129m worth of contracts as during the past four months, some smallish jobs were also secured (which were not material enough to warrant announcements). This means that the YTD new contracts already accounted for 21.5% of our assumed orderbook of RM600m.

 Hence, we estimate, by now, its outstanding orderbook have reached RM1.22b from RM1.10b. The orderbook will last 2 years.

 Assuming a 15% net margin, this contract alone will contribute RM5.5m per annum to bottom line until 2016.

Outlook  Given its status as the market leader coupled with the vibrant Sarawak’s growth story, we reaffirm our view that HSL is one of the major beneficiaries of the sustained development of infrastructure projects in Sarawak, driven by SCORE and the state’s urbanization.

 This is evidenced from it consistently securing more than RM500m worth of jobs per annum since 2012.

 As for this year and the next, we expect HSL to secure another RM600m worth of contracts, driven by SCORErelated projects (i.e. Samalaju, Mukah and Tanjung Manis) and Phase 2 of Kuching Centralised Wastewater System.

Forecast  Unchanged.

Rating Maintain OUTPERFORM

 We believe HSL’s strong fundamentals have yet to be fully-priced in. The stock offers potential total return of 24% (including dividend yield 2.6%). We like HSL as: (i) it is one of the biggest contractors in Sarawak majoring in marine engineering, (ii) it has consistently secured more than RM500m worth of jobs per annum since 2012, (iii) it posses bright earnings visibility driven by outstanding orderbook of RM1.22b with expected new orders of RM600m every year, and (iv) it has strong financials, i.e. amongst the highest margins in construction sector and strong cash pile (32 sen/share) with no borrowings.

Valuation  We reiterate our Target Price of RM2.31 based on fwd-PER of 11x FY15 EPS.

Risks to Our Call Failure to meet orderbook replenishment target of RM600m

 Higher-than-expected input costs.

 Slower-than-expected construction works progress

Source: Kenanga