INVESTMENT HIGHLIGHTS

• Hock Seng Lee reported 1QFY19 revenue at RM146.7m

• Civil Engineering and Construction performance was better compared to last year

• The property segment staged a jump in the quarter, with revenue climbing +20.6%yoy to RM21.0m

• Upgrade our call to BUY with an unchanged TP of RM1.54

Hock Seng Lee (HSL) reported 1QFY19 revenue at RM146.7m, higher by +11.4%yoy in comparison to the same period last year. Likewise, its earnings followed suit albeit at a slower pace with PATAMI rising +2.3%yoy to RM14.1m. On yearly basis, HSL’s PATAMI corresponded with 23.2% and 21.2% of our and consensus full year estimates respectively.

Civil Engineering and Construction performance was better compared to last year, as its income climbed by +9.9%yoy to RM125.7m in 1QFY19. The positive growth was attributable to the progress of major projects, which made up a large percentage of HSL’s outstanding jobs. Based on our forecast, the contribution from Pan Borneo Highway package is expected to remain firm until its due completion in 4QFY20. In CY19, we noted that new projects clinched are the infrastructure works for the Balingian coal-fired power plant worth RM54.3m and the construction of Batang Paloh Bridge project in Mukah worth RM299m. As of 1QFY19, HSL unbilled jobs stood at RM2.5b which will keep the group busy in the next four years.

The property segment staged a jump in the quarter, with revenue climbing +20.6%yoy to RM21.0m. The improvement was attributable to the timing of sales recognition, on the back of stable profit before tax margin which averaged at 31.4%. Going ahead, we expect HSL’s property income will continue to gain support from the variety of roll-outs in commercial, residential and industrial segments stemmed from La Promenade’s development plan.

No change to our forecasts, as earnings came in within our estimate.

Recommendation. HSL, being one of Sarawak construction players, is likely to ride on positive trend as the state government seems anchored to commit for large infra projects in the near term. In recognition of this, our optimism stays given the tangible flows of infra jobs (in the form of tender awards) shown since the beginning of this year. While our TP is maintained at RM1.54, we think the current share price of HSL is enticing due to recent weakness. Hence, we upgrade our call on the stock to BUY.

Source: MIDF Research - 24 May 2019