Hock Seng Lee Bhd (March 6, RM1.74)
Maintain buy with a fair value (FV) of RM1.80: We maintain our forecasts, “buy” call and FV of RM1.80 based on 15 times financial year 2017’s earnings per share of 12 sen, which is in line with our one-year forward target price-earnings ratio (PER) of 13 times to 15 times for mid-cap construction stocks.
The Sewerage Services Department Sarawak has awarded Hock Seng Lee Bhd (HSL) a RM333 million Centralised Wastewater Management System for Miri City (Phase 1A) contract which has been earmarked under the 10th Malaysia Plan.
There would be a total of four phases for the project. The project will begin on March 30 and is expected to be completed within 48 months. The allotted tasks include building a sewer line that connects with the property connection line. The project is expected to connect up to 750 property units with an approximate 40,000 population equivalent users to the sewer line.
HSL will adopt a similar approach of building the sewer line like the one in Kuching, using the gravity floor system. The sewers will be separated into three types: i) trunk sewer; ii) secondary sewer; and iii) tertiary sewer.
For the trunk and secondary sewers, both will be installed by trenchless technology using tunnel boring machines. Meanwhile, the tertiary sewer will be installed via the conventional open cut method.
Other construction jobs include two new and largest projects (that make up about 84% of HSL’s total outstanding construction order book of RM2.1 billion currently) still at the initial stages of implementation.
These are an RM1.7-billion Pan Borneo Sarawak Highway package (HSL’s 70% share is RM1.2 billion) and an RM750-million Kuching Central Wastewater Management Package 2 (HSL’s 75% share is RM563 million).
We like HSL as it is a good proxy for the booming construction sector in Sabah and Sarawak, backed by massive infrastructure developments such as roads (anchored by the RM16-billion Pan Borneo Sarawak Highway and the RM12.8-billion Pan Borneo Sabah Highway), ports, hydro power plants and water/wastewater treatment facilities.
Its earnings visibility is good, underpinned by a record outstanding construction order book of RM2.1 billion that will keep it busy over the next three to four years. — AmInvestment Bank, March 6
This article first appeared in The Edge Financial Daily, on March 7, 2017.