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Tuesday, June 07, 2016

HSL: Best Proxy for the Sarawak's Construction Sector

Background

Hock Seng Lee Bhd. ('HSL') is involved in the marine engineering, civil engineering, land reclamation, dredging and building construction as well as property development. Its businesses are grouped into 2 segments: the Construction and Property Development segments.


HSL's 2 main businesses

Property development segment, which contributes 15% of overall revenue, accounts for 37% of overall PBT. The reason is differing profit margin: 32% for property development & 15% for construction in FY2015.


HSL's current & future property development

Going forward, HSL's growth will be driven by two major contracts secured:
  • Kuching City Central Wastewater Management System: Centralized Sewerage For Kuching City Centre (Package 2) valued at RM750 million secured by a JV which HSL has a 75% interest
  • Pan Borneo Highway in the State of Sarawak - Phase 1: Bintangor Junction to Julau Junction and Sibu Airport to Sg. Kua bridge (including Batang Rajang bridge) valued at RM1710 million secured by a JV which HSL has a 70% interest
These plus its existing contracts worth about RM658 million will balloon its contracts in hand to RM2.4 billion.

Historical Financial Performance

HSL's revenue surpassed the RM600 million mark in FY2015. Its net profit remained below the RM80 million mark due to lower profit margin.


Chart 1: HSL's P&L for the past 10 years

The divergence between revenue & profit is due to the drop in profit margin for both construction & property development segments. Property development's profit margin dropped 6 percentage points from 38% in FY2011 to 32% in FY2015 while construction's profit margin dropped 5 percentage points from 20% in FY2012 to 15% in FY2015.


Chart 2: HSL's Segmental performance for the past 10 years

Recent Financial Performance

In the past 4 quarters, we can see an improvement in profit margin but revenue remained stagnant at the RM150 million mark.


Table: HSL's last 12 quarters' P&L


Chart 3: HSL's last 12 quarters' P&L

Financial Position

HSL's financial position as at 31/3/2016 is deemed very strong, with current ratio at 4.0x and total liabilities to equity at 0.2x. The group appears to have no borrowing. Instead it has a substantial cash balance of RM132 million (or cash holding of RM0.22 per share). Debtors collection period is however high at 161 days. This maybe due to the nature of construction business in the state.

Valuation

HSL (closed at RM1.69 yesterday) is now trading at a trailing PER of 14x (based on last 4 quarters' EPS of 12.25 sen). At this PER, HSL is deemed fully valued.

Technical Outlook

HSL made a high of RM2.14 in March (no thank to my untimely call). Since then, it has been in a downtrend line with resistance at RM1.72-1.73 (see Chart 4). The stock is trading not far from its long-term uptrend line support at RM1.65 (see Chart 5).


Chart 4: HSL's weekly chart as at Jun 6, 2016 (Source: ShareInvetor.com)


Chart 5: HSL's weekly chart as at Jun 6, 2016 (Source: ShareInvetor.com) 

Conclusion

Based on satisfactory financial performance & position, clear earning visibility and mildly bullish technical outlook, HSL could be a good stock to consider for long-term investment. Good entry level is at RM1.65-1.70. 

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, HSL.

4 comments:

lai said...

Hi Alex,

You are amongstr the few who admitted calling for a wrong shot/calls gone wrong

You have my utmost respect.

Keep up your noble work and f**kthe naysayers.

Alex Lu said...

Hi lai,

I always try to do my best for my clients and my readers. To achieve that, I need to improve on everything that I do everyday.

There is one thing that I learned from my involvement in Toastmasters; you can only improve if you know what you are doing right and what you are doing wrong. If you know, you will keep doing the right things and you will stop doing the wrong things.

Thus feedback is important. In Toastmasters, this feedback, which is called evaluation, is delivered in front of a "crowd". Imagine this; you are speaking in public and you immediately get evaluated by your peers. In life, the way we react to feedback/evaluation - even nasty ones - will determine whether we grow or stagnate.

I like to express my sincere appreciation for your kind words. Readers like yourself make all my hard work worthwhile.

Chun Mun said...

Hi Alex,
Can you comment on Century? Thank you

Alex Lu said...

Hi Chun Mun

Century's financial performance has not been very exciting for the past few years. Except for QE30/6/2015 & QE31/12/2014, its net profit has been hoovering around RM4-7 million. That will give you a full year EPS of about 6 sen. At the current price of RM0.83, its PER is about 14x. That's fairly expensive. (Note: Net profit for QE30/6/2015 & QE31/12/2014 was above RM10 million due to gain on disposal of a commercial land amounting to RM10.784 million in QE30/6/2015 and gain on disposal of property, plant and equipment of RM48.18 million and gain on revaluation of investment property of RM2.5 million in QE31/12/2014.

Chartwise, the stock should have support at RM0.80. If that support is violated, its next support would be at RM0.70. If it ever dropped to RM0.60, that's an excellent BUY for a rebound. The RM0.60 level will present support from the horizontal line as well as the long-term uptrend line.

Good luck!