INVESTMENT HIGHLIGHTS

• HSL received a LOA from Sarawak state government, for the proposed construction and completion of a rural connectivity projects

• The project carries a value of RM104.5m

• The job scope covers the piling works, earth/sand filling, geotechnical work, drainage and road pavement

• The job will likely contribute RM3.1m to RM4.2m, annualized based on straight-line estimates

• Maintain BUY with an unchanged TP of RM1.54

Hock Seng Lee has received a Letter of Acceptance from the Sarawak state government, on 16th August 2019. It was issued by Jabatan Kerja Raya Sarawak, for the proposed construction and completion of the Jalan Sg. Bidut/Kpg. Tutus/Kpg. Sebedil/Kpg.Bungan Kecil, Sibu Division (Package A), Sarawak (“the Project”). The project which was bid through an open tender exercise carries a value of RM104.5m.

The job scope covers the piling, earth/sand filling, geotechnical, drainage and road pavement works. It will draw on HSL’s expertise in marine engineering, given the structure of traversing low lying terrain. The progress is set to run in the next 24 months (until August 2021) from September 2019.

Background of project. It comprises the construction of paved roads, which span for 21km. HSL put their bid on the project in May 2019, which we understand to be part of Rural Transformation Project initiated by state government. By extension, the RTP has received RM6.2b allocation by the state, to raise rural connectivity that would complement the ongoing Pan Borneo Highway, in opening up new areas of economic growth.

Impact to earnings. The job will likely contribute RM3.1m to RM4.2m, annualized based on straight-line estimates. This was arrived after imputing 6%-8% net margin of the total project value. The figures fall within our estimates, hence no changes were made to our earnings forecasts.

Recommendation. Moving forward, HSL is expected to ride on a positive trajectory, given the state government’s commitment on large infra projects. In recognition of this, our optimism stays given the tangible flows of new 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 attractive. Hence, we maintain our BUY call on the stock.

Source: MIDF Research - 20 Aug 2019