Why I Like Hock Seng Lee

Hock Seng Lee is a marine engineering, civil engineering and construction company. The company undertakes dredging, land reclamation and earthworks, road and bridge construction, coastal protection works and other infrastructure and building works. The company through its subsidiary is engaged in property development and building construction activities. The company primarily operates in the Malaysia where it is headquartered in Sarawak and employs about 570 people.

The company recorded revenues of MYR309.1 million in the fiscal year ended December 2008. Its net profit was MYR41.8 million in fiscal 2008.

Projects are on track, with the Kuching City Wastewater Management System, Tanjung Manis land reclamation and infrastructure works and the Sibu flood mitigation project collectively accounting for 40% of HSL’s outstanding RM1.3b order book. Property development, though contributing only 15% of group pretax profit, will also provide medium-term earnings support, as HSL has a land bank of 600+ acres with GDV of RM1.5b. HSL is a steady, reputable company. Too many analysts have been focusing on major construction firms in the peninsula and kinda forgot about HSL.

Why the timing to buy is right:

1) Hello people, its October, and we have a budget if I am not mistaken. Sarawak is requesting additional funds from the federal government to complete the RM3 billion Centralized Sewerage System for Kuching City to treat household wastewater in the city. Sarawak Urban Development and Tourism Minister Datuk Michael Manyin said the project with three major components namely the wastewater treatment plant, sewer network and property connection would cover areas which are fully developed and densely populated. The Centralized Sewerage System for Kuching City project is divided into four packages and it costs RM3 billion. "I hope the project could be completed soon. However, it all depends on the availability of the money. Therefore, I'm going to fight for additional funds to implement the other three packages," he said. Sarawak Sewerage Service Department is responsible for implementing all sewerage-related projects in the state, and has been entrusted by the government to implement the centralized sewerage system for Kuching City. Kumpulan-Nishimatsu-Hock Seng Lee Consortium is the turnkey contractor while the consultants involved are Jurutera Jasa (Sarawak) Sdn Bhd and CH2M Hill, a US-based company with a branch in Singapore. Manyin said Package One of the project, costing RM530 million and covering five major areas in the city, had started in October last year and was scheduled for completion in 2012. The Package One is 9.35 per cent completed as of August this year.

2) On 17 July 2009, Hock Seng Lee together with Dwimula Bina Sdn Bhd and Pembinaan Nomisual Sdn Bhd have been awarded a government project worth RM137.15mil for a flood mitigation project in Sibu, Sarawak. HSL said the project would be carried out as an unincorporated joint venture with Dwimula and Pembinaan Nomisual with HSL having an 85% stake. It said the project would be completed by February 2012 and was expected to contribute positively to its earnings and net assets for the financial years ending Dec 31 2009 to 2012.

3) Potential projects that HSL could garner in the near future Estimated project value (RM m)
1) Murum Road, Kapit (5 packages) 700-800
2) Nanga Merit, Kapit (2 packages) 1,400
3) Ba Kalalan road building 600-700
4) Maritime Base 300-400
5) Bridge in Batang Sadong 200
6) Extension of Sibu Airport 150
7) Dredging works at Miri port 120
8) Road construction works by Kementerian Pembangunan Luar Bandar in Sabah and Sarawak 4,000

4) The Sarawak state elections are expected to be held between end-2010 and early-2011. Like it or not, its politically plausible to believe that there will be an acceleration in development in Sarawak before the next state election given that East Malaysia played an important role in Barisan Nasional’s 2008 General Election win.East Malaysian construction players would benefit from further good news from the budget for infrastructure development in that region along with the Sarawak Corridor of Renewal Energy (SCORE). HSL niche in Sarawak’s dredging and land reclamation activities have been undervalued and out of the radar of too many investors and analysts.

HSL has about 582.6m shares and currently at just RM1.00, making its market cap at RM582.6m as well. HSL SB holds 57%, Amanah Raya (Skim Amanah Saham Bumiputera) holds 11.05% and EPF has 6.4%. The free float is around just 25%. Doesn't take much for HSL to move towards fairer valuation levels. EPS should grow by at least 26% in 2009 and 2010. The earnings momentum is just about right with October budget around the corner. Currently at just 10x 2009 earnings and 8x 2010 earnings, its relatively cheap and undemanding. HSL has a current order book of some RM1.8bn. The potential new projects will swell the prospects of HSL. Its net cash flow was a respectable RM15.8m in 2008 and should swell to RM23m in 2009 and RM35m in 2010. Looking to break through its 52 week high of RM1.02, HSL should trade closer to RM1.30-RM1.40 on a better recognition of its prospects ahead.

p/s photos: Chen Kuang Yi