Hock Seng Lee: 2011 to be at least as good as 2010

KUALA LUMPUR: Hock Seng Lee Bhd (HSL), East Malaysia's largest construction firm by market capitalisation, expects this year to be at least as good as 2010 on potential jobs within the Sarawak Corridor of Renewable Energy (Score).

The potential projects, according to HSL's corporate affairs manager Sonja Gan, included sewage works, flood mitigation and various infrastructure and building works, especially the Mukah and Tanjung Manis areas where HSL's strength in reclamation came to the fore.

"We are currently eyeing further projects in Mukah and Tanjung Manis including a road, airport works, an educational institution and further reclamation and infrastructure contracts," she told The Edge Financial Daily. "It is noteworthy that all these prospective contracts involve considerable amount of reclamation or sand filling which is HSL's core strength."

HSL has close to RM400 million worth of ongoing projects in Mukah and Tanjung Manis and is well versed in the operating conditions at this relatively remote part of central Sarawak, according to Gan.

The Sarawak-based company had previously completed a sea port, fishing port, airport extension and a number of road and industrial park reclamation projects in the vicinity, she added.

According to notes accompanying the company's financial statements on Nov 25, 2010, HSL presently has RM1.95 billion worth of projects in hand of which RM1.25 billion are outstanding.

"We are currently actively pursuing package 2 of the Kuching centralised wastewater project which may be worth some RM500 million," said Gan. "Having invested heavily in the necessary technology including advanced tunnel boring machines, we feel well qualified to continue with further packages of the project both in Kuching and subsequently in other major cities in the state."

Other potential projects for 2011 include further roads in Bintulu and Kuching, roads and bridges associated with Score and an industrial estate extension in Samarahan, she added.

For the nine months ended Sept 30, 2010 (9MFY10), HSL's revenue totalled RM338 million, up 29.15% from the previous corresponding period while net profit amounted to RM51.81 million, a jump of 33.91% from RM38.69 million previously.

"We had a record year in 2009 and we will announce our FY10 results at the end of February 2011," said Gan. "Looking at our 3Q10 results you can see we are well on track to achieving another record-breaking year."

HSL recorded a revenue of RM375 million for FY09, up 21% from RM309.1 million a year ago. Net profit was 34.61% higher year-on-year at RM56.3 million, the highest since the company was listed in 1996.

According to Bloomberg data, the counter at its closing price of RM1.85 on Jan 28 was traded at a forward price-to-earnings ratio (PER) of 14.1 times.

With net asset per share of 60 sen as at Sept 30, 2010, HSL trades at a price-to-book ratio of 3.1 times on Jan 27, 2010.

The company is virtually debt free. It has a net cash position of RM80.6 million as at Sept 30, 2010, which is 5.55% higher than RM76.4 million as at Dec 31, 2009.

Analysts are bullish on HSL on the company's prospect of securing more jobs under the Sarawak infrastructure theme, partially fuelled by the upcoming state elections. All seven analysts who released reports on its most recent results had a "buy" recommendation on the stock.

The consensus target price on the stock is RM2.21, according to Bloomberg data. This is 19.5% or 36 sen higher than its Jan 28 closing of RM1.85, which gave the company a market capitalisation of RM1.08 billion.

For one, OSK Research said 2011 should be even better for HSL. The research house pegged a target price of RM2.32 for the stock based on a forward PER of 14.5 times, which is two standard deviations above HSL's historical mean PER.

"We argue that the stock's premium valuations are warranted given its uninterrupted earnings growth for eight consecutive years at a 25.1% CAGR (compounded annual growth rate), above-industry profit margins, net cash position and expertise in marine engineering," it said in a research note to clients on Jan 14.

According to Maybank IB Research, HSL's new jobs secured, worth a total of RM530 million in 2010, are sufficient to provide for two years of strong earnings growth at 20% per annum into 2011.

"We expect margins to sustain at 19% to 20% (blended) for construction," it said in a research note to clients on Nov 26, 2010. "We are still positive on HSL delivering double-digit earnings growth into 2011 and benefiting from job flows under Score."

HSL had in December last year completed a share dividend exercise rewarding shareholders on the basis of one treasury share for every 50 ordinary shares of 20 sen each held. This translates into a return of 3.7 sen per share based on the stock's closing price of RM1.85 on Jan 28.

"A final dividend will be announced in conjunction with the annual results next month," said HSL's Gan. In 2009, HSL paid out a pre-tax total of 2.4 sen a share in dividends.

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