We have a NEUTRAL call on Hock Seng Lee, with a MYR2.06 FV. It is a good proxy to the enormous infrastructure spending in Sarawak. This is backed  by  the  Sarawak  Corridor  of  Renewable  Energy  (SCORE), urbanisation  and  rural  development.  Its  solid  new  contract  pipeline  is underpinned  by  Phase  2  of  the  Kuching  Centralised  Sewerage  System and other public infrastructure projects in the state. 

Construction  jobs  aplenty  in  East  Malaysia.  The  prospects  of  the construction  sector  in  East  Malaysia  are  strong,  propelled  by infrastructure  works  from  three  main  initiatives,  namely:  i)  SCORE (roads,  water  supply  and  port),  ii)  urbanisation  (flood  mitigation,  waste management  and  traffic  diversion),  and  iii)  rural  development  (roads, water supply and housing).  

Bullish on contract wins. The company, via the Kumpulan Nishimatsu–Hock  Seng  Lee  consortium,  is  in  the  final  stages  of  negotiations  with Sarawak’s state authorities in relation to  the implementation of Phase 2 of  the  Kuching  Centralised  Sewerage  System.  Based on  our  estimates, this project is worth about MYR800m. In addition, Hock Seng Lee is also bidding for “several infrastructure, flood mitigation, water-related,  mass reclamation, power plant and affordable housing projects”.  YTD,  the company  has  secured  MYR181m  worth  of  new  jobs.  Its  outstanding construction orderbook currently amounts to MYR1.35bn.

Risks.  These  include:  i)  contract  wins  in  FY14-15  falling  short  of  our assumption of MYR600m per year, ii) an escalation in input costs, and iii) weak demand for its property launches.

Maintain  NEUTRAL.  Apart  from  the  strong  prospects  for  the construction sector in East Malaysia, we also like Hock Seng Lee for its sustained  high  margins  in  view  of  the  limited  competition  from  only  a small pool of Sarawak state-registered (UPK) contractors for most public jobs in the state. We also like its strong balance sheet, with a net cash of MYR154.6m, or 27 sen/share as at 31 March 2014. Our FV of MYR2.06 is  based  on  12x  FY15F  EPS,  in  line  with  our  10-16x  1-year  forward target P/Es for the construction sector.

Financial Exhibits

Company Profile

Hock Seng Lee is a Sarawak-based construction company that is also engaged in property development in the state.

Source: RHB