This article first appeared in The Edge Financial Daily, on March 2, 2016.

Hock Seng Lee Bhd
(March 1, RM1.94)
Maintain “buy” with an unchanged fair value (TP) of RM2.30: Our sum-of-parts (SOP) valuation on Hock Seng Lee Bhd (HSL) includes a 12 times price-earnings ratio (PER) for the construction segment. HSL has won a RM58.2 million job under a RM280.9 million substation contract secured via a consortium with India’s Larsen & Toubro Ltd group. The contract was awarded by Sarawak Energy Bhd for the construction of the proposed Samalaju-2 275/132/33kv substation.

In an announcement on Monday, HSL said it is in the consortium with Larsen & Toubro and its associate Larsen & Toubro (East Asia) Sdn Bhd. The company said its scope of work under the RM58.2 million portion includes earth works, pilling, civil infrastructure works, building and its related mechanical and electrical works.

The contract period for the completion and commissioning of the overall project is 21 months starting from March 7 this year.

This is positive, as the outstanding order book is depleting, while it is awaiting the outcome of tenders, including a work package under the Pan Borneo Highway, the Kuching central wastewater management project, and other jobs within the Sarawak Corridor of Renewable Energy region. HSL has a track record of having constructed over 800km of roads in Sarawak and last year it completed the RM450 million package one of the Kuching central wastewater management project.

The remaining 10 packages of the Pan Borneo Highway are expected to be rolled out this year. We believe the Kuching central wastewater project will also be awarded within the year.

We maintain our forecasts and our new job assumption at RM600 million for financial year 2016 forecast. As at end-2015, the current outstanding order book stood at roughly RM600 million — about half of its high within the last couple of years. These include over RM170 million worth of ongoing internal property projects under construction. 

We continue to believe HSL would be a strong beneficiary of job news flow in the lead up to the impending state elections, slated for end-April. We maintain a “buy” on HSL. — AmInvestment Bank, March 1