We are keeping our NEUTRAL call, forecasts and MYR2.06 FV for HSL, following the release of its 9M13 results that came in within expectations. While we like the company as it is a good proxy to SCORE and urbanisation/rural development in Sarawak, we believe investors should only revisit the stock on dips given its rich valuations.

• Decent 9M. Hock Seng Lee (HSL)’s 9M13 net profit came in at only 68%/64% of our and consensus full-year forecasts respectively.However, we consider the results within expectations as we expect astrong 4Q when newer projects start to hit more significant billingmilestones.
• Forecasts. Maintained.
• Risks. These include: i) new contracts secured in FY14 coming in below our target of MYR600m, and ii) an escalation in input costs.

• Maintain NEUTRAL. The prospects for the construction sector in East Malaysia are strong, underpinned by infrastructure works from three main initiatives, namely: i) Sarawak Corridor of Renewable Energy (SCORE)(roads, water supply and port), ii) urbanisation (flood mitigation, waste management and traffic diversion), and iii) rural development (roads,water supply and housing). We also like HSL for: i) its sustained high margins given limited competition from only a small pool of Sarawak state-registered (UPK) contractors for most public jobs in Sarawak, and ii) its strong balance sheet with a net cash of MYR157.3m or 27sen/share as at 30 Sept 2013. Our FV is unchanged at MYR2.06, based on 12x FY14 EPS, in line with our 1-year forward target P/E for the construction sector of 10-16x.

Source: RHB