Hock Seng Lee : A Soft Patch, But Prospects Remain Bright BUY

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Hock Seng Lee : A Soft Patch, But Prospects Remain Bright           BUY

KWe revise down our FY16F/FY17F/FY18F earnings forecasts for Hock Seng Lee (HSL) by 6%, 9% and 4% respectively. We lower our FV by 9% to RM1.85 (from RM2.03) based on 15x revised FY17F EPS of 12.3sen, in line with our 1-year forward target PE of 13-15x for mid-cap construction stocks, but maintain our BUY call. The lower earnings forecasts are mainly to reflect the changes in our assumptions on the timing of the profit recognition from the two key projects, namely the RM1.7bil Pan Borneo Highway package (HSL's 70% share is RM1.2bil), and the RM750mil Kuching Central Wastewater Management Package 2 (HSL's 75% share is RM563mil). We understand that due to the extensive preparation works involved, these two projects (that make up about 80% of HSL's total outstanding construction orderbook of RM2.2bil currently) did not quite contribute in 4QFY16F, and will take time before they could be ramped up to full speed from FY17F.

We now project HSL's earnings to contract by -16.3% in FY16F (vs. -11.3% we projected previously), but bounce back by +12.7% in FY17F and +32.6% in FY18F, as the two key jobs hit major billing milestones. We still like HSL as it is a good proxy to the booming construction sector in East Malaysia, backed by massive infrastructure developments such as roads (anchored by the RM16bil Pan Borneo Sarawak highway and RM12.8bil Pan Borneo Sabah highway), ports, hydro power plants and water/wastewater treatment facilities. Its earnings visibility is good, underpinned by a record outstanding construction orderbook of RM2.2bil that will keep it busy over the next 3-4 years.

Others :

Sunway Reit : Acquisition of First Industrial Property for RM91.5 mil         HOLD

Bumi Armada : Unexciting US prospects                HOLD

ECONOMIC HIGHLIGHTS

Malaysia : Expect sustainable growth in 2017

NEWS HIGHLIGHTS

Consumer Sector : Five more Kenny Rogers outlets to open in Klang Valley

Property Sector : Sunway REIT buys first industrial real estate for RM91.5mil

Automobile Sector : Naza targets 2,500-unit sales for Peugeot this year