New contract for HSL within analysts’ projections
KUCHING: Analysts are slightly optimistic on Hock Seng Lee Bhd (HSL) following the group’s new contract award -- under the Consortium with Larsen & Toubro Ltd and Larsen & Toubro (East Asia) Sdn Bhd -- by Sarawak Energy Berhad for the Matang 275/132/33/kV Substation Project in Kuching.
The contract, valued at RM91 million, is expected to provide RM41millionrevenuecontribution to HSL based on its 45 per cent equity in the consortium.
The scope of job covers earth works, piling, civil infrastructure work, building and its related mechanical and electrical works. We believe the job awarded fell under HSL’s expertise and labour capacity, which will likely mute the risk of unbudgeted capex during the contract period. The project is expected to be completed in 32 months, from January 2019 to August 2021.
This is the second construction job win for the company this year. The first contract HSL received is from Sarawak Energy and Maktab Rendah Sains Mara.
“Notably, HSL’s 45 per cent equity in the consortium will fetch approximately RM1.2 million to RM1.5 million of yearly profit contribution, arrived after imputing eight to 10 per cent net margin of the total project value,” the team at MIDF Amanah Investment Bank Bhd ( MIDF Research) calculated in its analysis yesterday.
“The quantum has already been captured in our job wins assumption; hence we make no changes to our earnings forecast.
“Moving forward, we consider the prospect of HSL business to be exciting, fuelled by the potential roll out of Sarawak infrastructure packages. These include The Coastal Road, the Second Trunk Road and the state’s water grid projects.
“In the near term, we are expecting property segment to lend support in 4Q18 as it completes several phases of residential development at Samariang Aman 2 and La Promenade. We recommend a buy on the stock with a target price of RM1.54.”
While positive with this contract, Public Investment Bank Bhd’s research division (PublicInvest Research) made no adjustment to its earnings estimates for HSL as it did not see contribution in FY18, while also assuming this as part of FY19 replenishment.
“We maintain our neutral call on HSL, with an unchanged target price of RM1.21. We believe it is justifiable given the local construction sector outlook is cloudy due to the absence of new mega projects in the near-term which led the earnings momentum among the industry players remaining challenging going forward.”
Researchers with Hong Leong Investment Bank Bhd ( HLIB Research) saw that HSL’s orderbook now stands at circa RM2.4 billion which translates to a decent cover of 5.6 times its FY17 construction revenue.
“We understand the company is currently bidding for work packages from Sarawak Coastal Road Project and Trunk Road project which are expected to cost circa RM11 billion.
“Moreover, a total of 247 water related projects including water treatment plants, water piping upgrading works and wastewater management worth RM2.8 billion is expected to be implemented over the next two years.”