INVESTMENT HIGHLIGHTS

• Hock Seng Lee reported 2QFY19 revenue of RM175.4m

• Civil Engineering and Construction’s revenue climbed +9.2%yoy to RM151.4m in 2QFY19

• Recognised property sales jumped strongly by +54.5%yoy to RM24.0m in 2QFY19

• Earnings estimates left unchanged at this juncture

• Maintain BUY with an unchanged TP of RM1.54

Hock Seng Lee’s (HSL) 2QFY19 revenue came in at RM175.4m, higher by +13.7%yoy in comparison to the same period last year. Similarly, its earnings followed suit with PATAMI rising by +16.4%yoy to RM16.4m. On a yearly basis, HSL’s PATAMI corresponded with 50.3% and 46.6% of our and consensus’ full year estimates respectively. Positively, the results are within expectations.

Civil Engineering and Construction jobs contributed 86% to revenue. Segment revenue rose by +9.2%yoy to RM151.4m in 2QFY19. This was underpinned by the better progress billings of major infrastructure jobs, which made up a large percentage of the orderbook. Accordingly, the segment’s pre-tax profit increased by +11.2%yoy to RM15.0m in the quarter. Based on our forecast, contribution from its Pan Borneo Highway job is expected to remain firm until its due completion in FY20. As of last quarter, its unbilled jobs stood at RM2.5b providing earnings visibility for the next four years.

Recognised property sales jumped strongly by +54.5%yoy to RM24.0m in 2QFY19. Accordingly, segment income translates to RM6.9m of pre-tax profit, +23.6% higher from the same period last year. Moving forward, we believe that the variety of product roll outs namely commercial, industrial and residential is expected to strengthen its earnings. By extension, the property development projects in the pipeline are worth RM340m. The prospect seems intact for the segment, which currently sits on RM250m of unbilled sales.

Earnings impact. No changes to our forecasts, at this juncture.

Dividends declared. The group has declared first interim dividend of 1sen per share for FY19. This implies YTD pay-out ratio of 20%.

Recommendation. Moving forward, HSL is expected to ride on positive trajectory, given the state government’s commitment on large infrastructure projects. In recognition of this, we are encouraged by 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 - 23 Aug 2019