Hock Seng Lee - 1Q15 in line with expectations BUY, 21 May 2015

We maintain BUY on Hock Seng Lee Bhd (HSL), with an unchanged SOP fair value of RM2.30/share, following its 1QFY15 result. HSL’s 1QFY15 net profit came in at RM19.6mil (-2.7% QoQ, +19.7% YoY) – accounting for 21%-22% of our and consensus estimates, respectively.

We deem the result to be in line with expectations. Its 1Q is traditional the weakest quarter, given the lunar New Year festival and the rainy season. No dividend was declared. It traditionally declares semi-annual dividends at the half-year and final quarter marks.

Construction margins improved slightly QoQ, but pressure remained amid the “predominance of open tender procurement and the general rise across all our operating costs.” In a statement, HSL also said Sarawak’s construction industry was being impacted by inflationary pressures and a shortage of labour shortage. For now, we maintain our construction EBITDA margin assumption at 18%. As at end-March 2015, HSL had an outstanding order of RM870mil, 1.4x its FY14 revenue of RM605mil.

The group secured RM105mil worth of new projects in 1QFY15, including an access road and water intake project in the SCORE knowledge hub of Mukah. Notably, in 1QFY15, HSL completed the construction of the RM452mil first phase of the Kuching central sewerage system. The state has yet to award the remaining phases, which could have a total contract value of another RM3.5bil.  We believe HSL remains as the frontrunner to undertake the remaining phases.

We maintain our annual new order assumption at RM600mil. The risks include a failure to secure the 2nd phase of the Kuching central sewerage project (estimated at RM500mil) and slowdown in construction jobs amid a depleting order book. The bulk of its outstanding order will be completed over FY15F-FY16F. HSL continues to expect to participate in the RM27bil upgrading of the Pan-Borneo Highway and the state’s rural development agenda.