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City Developments Ltd (AmFraser); maintain buy; fair value: S$12.72

Sibu’s flood of wealth

Investment Highlights

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• We are re-iterating our BUY rating on Hock Seng Lee Bhd (HSL) – based on an unchanged 10% discount to its Sumof-Parts value of RM2.22/share. We peg HSL’s construction segment to 13x average construction earnings while its property division is worth RM0.42/share, with net cash at RM0.07/share.

• The riverside town of Sibu, Sarawak is in the limelight due to its upcoming parliamentary by-election this weekend, following the death of its previous Member of Parliament. However - unlike the previous by-election Hulu Selangor – the much touted gung-ho Federal development expenditure has been less forthcoming.

• On Sibu’s main issue, its flood woes, the Deputy Prime Minister Tan Sri Muhyiddin Yassin has reassured the town that it will be included in the Federal Government’s future spending.

• The flood mitigation project, reported to be around RM1bil, will be in phases spanning until end of the 11th Malaysia Plan (11MP). Package one of phase one, worth RM137mil was awarded to HSL in 2QFY09. The whole of phase one will comprise RM300mil.

• We expect the balance of Phase 1 together with another RM528mil will be spent, on a piecemeal basis to protect Sibu against severe floods with another RM50mil for improvement of its internal drainage system to be announced in 10MP. HSL will be the frontrunners as the group is the incumbent project owner.

• Furthermore, HSL’s civil engineering expertise in dealing with marsh land, in hand with its dredging capabilities gained from the Kuching sewerage project will solidify the group’s position to win the rest of the phases.

• Nonetheless, we do not rule out announcement of major infrastructure projects, which are already in the planning stages, to accelerate with the upcoming Sarawak state elections, due by mid-2011 (See Table 1-2).

• We maintain our BUY, due to it being an immediate beneficiary of Sarawak Corridor of Renewable Energy (SCORE) infrastructure spending. Stock is trading at an undemanding FY10F-12F PEs of 9x-12x against an impressive EPS CAGR of 26% and long-term PE of 13x.

SIBU BY-ELECTION

altAlready a BN bastion

The riverside town of Sibu, Sarawak is in the limelight because of its upcoming parliamentary by-election, following the death of its incumbent. However - unlike the previous by-election Hulu Selangor – the much-touted gung-ho Federal development expenditure has been less forthcoming.

It was reported that close to RM77mil was pledged by the Federal Government for a PLUS highway connection and other infra upgrades in Hulu Selangor.

We feel that the slim win in Hulu Selangor, despite the spending assurances has led the Federal Government to pursue a different route for its manifesto. Focus has shifted to highlight previous spending in Sibu i.e. phase one of flood mitigation programme and Sibu airport expansion.

Furthermore, Sibu P212 has always been a Barisan Nasional’s stronghold, going by last parliamentary election in 2008 (See Chart 2).

Jingle jingle carrots
We do not expect any major project announcement for byelection in Sibu, nonetheless the much anticipated 10MP would enhance infrastructure focus on Sarawak Corridor of Renewable Energy (SCORE). More than 8% of 10MP budget allocation will be shifted to Sarawak (See Chart 1).

IMMIDIATE PROXY TO SCORE

Rugged terrain and marsh land

HSL remains a niche player in Sarawak’s construction play. With SCORE’s three main growth nodes in Tanjung Manis, Mukah and Similajau all allocated along coastal lines, the group’s reclamation expertise in dealing with marsh land, in hand with its dredging capabilities gained from the Kuching sewerage project will solidify the group’s ability to grab civil works opportunities from SCORE.

What is more important to note that civil works, namely in Sarawak, commands an impressive 18%-22% margins; which allows HSL more flexibility in project management in the event of heavy orderbook obligation.

altWe expect the balance SIbu’s flood mitigation project of RM828mil will be spent, on a piecemeal basis to protect Sibu against severe floods with another RM50mil for improvement of its internal drainage system to be announced in 10MP. HSL will be the frontrunners as the group is the incumbent project owner.

Furthermore, development of access roads leading to SCORE’s vast energy projects would need an immediate “local hand” in overcoming Sarawak’s mountainous land. Management provides that the group is earmarking up to RM3.6bil road jobs from the 10MP (See Table 1).

Maintain BUY at RM2.00/share
We continue to like HSL as an excellent proxy to SCORE. Stock is trading at undemanding FY10F-12F PEs of 9x-12x against robust EPS CAGR of 26%. We value the stock at an unchanged fair value of RM2.00/share, based on an unchanged 10% discount to its Sum-of-Parts value of RM2.22/share.

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