KEY INVESTMENT HIGHLIGHTS

• HSL’s quarterly revenue largely composed of civil engineering and construction income, at 86%

• Property sales rose to RM24.5m (+5.8%yoy) in 3QFY19

• We make no changes to our estimates, as earnings came in within our expectation

• HSL in a sweet spot to take advantage of construction jobs in Sarawak

• Maintain BUY with TP unchanged at RM1.54

Hock Seng Lee’s (HSL) 3QFY19 revenue came in at RM173.8m, higher by +0.3%yoy in comparison to the same period last year. Similarly, its earnings followed suit with PATAMI rising +1.7%yoy to RM14.6m. On a yearly basis, HSL’s PATAMI corresponded with 74.3% and 71.0% of our and consensus full year estimates respectively.

HSL’s quarterly revenue largely composed of civil engineering and construction income, at 86%. Quarterly revenue from the segment was little changed, coming in - 0.5%yoy lower at RM149.4m. Cumulatively, the revenue for 9MFY19 was better than last year, at RM426.4m (+5.8%yoy). Against this backdrop, earnings for 9MFY19 have grown marginally by +2.9%yoy to RM38.8m. As of last quarter, we noted that RM2.5b worth of unbilled jobs to sustain earnings until 2023. Management highlighted that the company will be kept busy on work executions as its mega-projects were progressing well into their mid-phases. Notably, Miri Wastewater, Kuching Wastewater Management and Pan Borneo Highway are some of the high value projects which make up HSL’s outstanding orders.

Property sales rose to RM24.5m (+5.8%yoy) in 3QFY19. Despite the higher sales, it translates to RM8.2m of pre-tax profit, a notable decline of -11.3%yoy. Whilst sales were recorded higher in the quarter, it came at the expense of margin due to discounts and increase in construction cost. Consequently, it was shown that margin at pre-tax slipped -6.5ppts(yoy) from 3QFY18. On a positive note, the 9MFY19 segmental performance was better compared to last year with pre-tax profit recorded at RM21.9m (+8.0%yoy).

Earnings impact. We make no changes to our estimates, as earnings came in within our expectation.

Recommendation. The prospect of construction and engineering jobs in Sarawak remains bright, enabled by the state government commitment to further improve the state’s infrastructure. In view of this, we see HSL as a strong local player, to take advantage of the vast job opportunities to further strengthen its income base. On that note, the prospect of HSL warrants us to maintain our BUY call with TP unchanged at RM1.54.

Source: MIDF Research - 19 Nov 2019