HSL : Maintain BUY at RM1.70 with target price RM1.90

Hock Seng Lee gets another lift to order book

Hock Seng Lee Bhd
(Sept 22, RM1.69)
Maintain buy at RM1.70 with target price RM1.90: Hock Seng Lee’s (HSL) RM99 million new road contract in Samarahan, Sarawak, has lifted its outstanding construction order book to RM1.32 billion (+8%). There is no change to our earnings forecasts as we have imputed job win potential in our model. We maintain our ‘buy’ call on HSL for its exposure to Sarawak’s huge construction potential. Our target price is unchanged at RM1.90 (13 times 2011 earnings).

HSL has clinched a contract from AF Construction Sdn Bhd for the construction of the Gedong-Simunjan Road. The contract value is RM98.7 million and works include earthworks, road, drainage and bridges. The completion deadline is March 2013. This has positively lifted HSL’s order book to RM1.32 billion in outstanding works value, we estimate, of which RM444 million are new works secured in 2010.

We estimate this new job will contribute RM13 million in net profit (2.3 sen EPS) assuming 18% in gross margin. Much of the recognition would be in 2011/12. We retain our earnings forecasts as we have imputed RM600 million potential job wins for 2010. Based on the strong momentum for job awards in Sarawak, HSL should have no problem meeting our job win forecast for the year. — Maybank IB Research, Sept 22


This article appeared in The Edge Financial Daily, September 23, 2010.