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Hock Seng Lee Bhd (Inter-Pacific Research) outperform; target price RM1.74

Result within expectation

Highlights:


Valuation: We are recommending Outperform with target price of RM1.74 ascribing forward PE of 12.5X and EPS of 13.9sen. Infrastructure development in Sarawak continues to intensify, driven by the Government’s stimulus packages and the Sarawak Corridor of Renewable Energy (SCORE) initiatives. These offer good potential for HSL. With the first quarter financial results bettering the corresponding quarter of 2009, HSL is positioned for another year of growth.

Revenue increased by 18.7%y/y 1QFY10 to RM92.4mn: Due to seasonal factor, the first quarter revenue is traditionally slower, hurt by rain and festive. Thus, 1QFY10 revenue made up only 19.3% of our full year forecast. Nonetheless riding on the wave of infrastructure development in Sarawak and drawing on its marine engineering strength, revenue contribution from construction segment increased by 19.6% y/y to RM84.8mn while property development improved by 9.4% y/y to RM7.6mn.

Margin improvement: 1QFY10 net profit margin had increased by 9.5% y/y on the back of significant step up in operating income for construction and property development segment. Operating margin for construction and property development had improved by 31.6% and 44.4% respectively.

RM1.1bn outstanding order-book to underpinned revenue growth: Following the completion of educational institution in Bintulu and road works at Panchor, Kuching, HSL bid of several infrastructure projects for FY10 has been rewarding. HSL had procured two new road projects, a building works contract in Samarahan and a wharf at Muara Tebas bringing the order book to RM1.7 bn with RM1.1 bn outstanding.

Property development segment to improve in 2HFY10: Following the robust sales of FY09 year end launching of The Leaf, which achieved more than 90% sales in about 4 months, HSL had planned to introduce a mixed development worth RM900mn along the Kuching-Samarahan Expressway.

Modeled after The Leaf which adopted high end gated and guarded concept, the mixed development named La Promenade is expected to be launched in the 2HFY10, providing growth catalyst to property development segment.

Other on-going projects included Vista Aman in Samarahan, Highfields in Batu Kawa, Lavender Hills along Kuching-Serian Road and Vista Parade. We believe contribution from property segment would be stepping up from about 15% of HSL revenue or between RM8 to RM9mn post the launching of La Promenade.

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