Compelling opportunities from HSL’s key strengths

Hock Seng Lee Bhd (Sept 19, RM1.73)

Reiterate buy recommendation with an unchanged target price (TP) of RM2.19: Hock Seng Lee Bhd’s (HSL) share price weakness unveils compelling opportunities. Noticeably, HSL’s share price slid about 17.6% from its peak of RM2.10 per share in March. However, its key underlying strengths would not be eternally muted by market volatility and overblown risk aversion, hence we reckon its share price is poised to rebound.

HSL’s forward earnings are underpinned by an unbilled order book of RM2.3 billion, or approximately a six-year backlog (3.7 times financial year 2015 [FY15] construction revenue cover). The order book is of good quality as it mainly comprises public infrastructure projects with higher margins, such as the Pan Borneo Highway Bintangor-Julau/Sibu Airport-Sg Kua packages and Kuching Wastewater Treatment Plant Project 2. Furthermore, HSL’s order book is balanced with the Precinct Luxe property development worth RM200 million. We are confident that the take-up rate would be encouraging inferring from the success of Precinct Premiere within the La Promenade’s 200-acre (80.93ha) mixed development project.

HSL’s management also focuses on building a strong balance sheet as evidenced from its five-year working capital compound annual growth rate of 14%. Its stable growth denotes sufficient financial headroom to undertake more projects in excess of RM500 million from internal funding. This is premised on its FY15 working capital/net income cover of 2.24 times and FY15 working capital/order book cover of 0.7 times. Comparably, HSL has delivered an average eight-year return on equity (ROE) of 18.4%, compared with the KLSE Construction Index’s average ROE of 7.9%. Note that HSL’s 12.1% return of capital exceeded its weighted average cost of capital of 7.8%.

We continue to favour HSL due to its key strengths and management’s strategy, thus reaffirm our earnings forecasts for FY16 and FY17.

Altogether, we reiterate our “buy” recommendation with an unchanged TP of RM2.19 per share based on the discounted cash flow method. — MIDF Research, Sept 19

Not sure how much you will have to pay a month for your home? Check out our mortgage calculator here.

This article first appeared in The Edge Financial Daily, on Sept 20, 2016. Subscribe to The Edge Financial Daily here.