Hock Seng Lee’s 2Q21 results below market expectations

by NUR HAZIQAH A MALEK / pic source: hsl.com.my

HOCK Seng Lee Bhd (HSL) second quarter of 2021 (2Q21) performance came in below expectations of brokerages as the period figures were only 41.3% of financial year 2021 (FY21) earnings estimates. 

MIDF Investment Bank Bhd (MIDF Research) analyst Ummar Fitri said the poor performance from HSL was mainly attributable to the lower than expected gross profit margin on existing projects. 

“We posit the group’s revenue and earnings prospects remain healthy moving forward in anticipation of recovery in FY21 earnings following the resumption of construction activities and Sarawak’s state government focus on infrastructure developments. 

“The group’s prospect is also well-supported by its healthy outstanding orderbook of about RM1.8 billion for its construction division which will provide earnings visibility over the next two to three years,” the MIDF analyst wrote in a research report yesterday. 

He added that HSL could continue to be a beneficiary from the potential mega infra projects rollout in the state of Sarawak and Sabah namely big-ticket projects like the Sarawak-Sabah Link Road, Coastal Road, the Trans-Borneo Highway project, Sarawak Water Supply Master Plan and Water Grid, and the Sarawak Petrochemical Hub in the foreseeable term. 

MIDF thus maintained a ‘Buy’ recommendation on HSL. 

The group’s earnings estimates have also been revised downwards for FY21 and FY22 by 29% and 16% to RM31.3 million and RM44.842 million respectively as revenue and earnings assumptions have been lowered. 

In view of the revision to the earnings estimates and rolling over its valuation base year to FY22, MIDF Research is revising its target price for HSL to RM1.06 (previously RM1.14). This is derived by attaching a price to earnings ratio (PER) of 13multiples to the group’s FY22 earnings per share.

“The PER represents one standard deviation premium to the group’s five-year historical average,” he said. 

Ummar is attaching a premium to HSL due to positive sentiments in East Malaysia’ benefit from a larger budget allocation for development spending on the state of Sabah and Sarawak. 

He added that HSL’s normalised earnings for the year-to-date period climbed by 55.5% year-on-year to RM17.86 million despite movement restriction period as construction works are deemed as essential services and allowed for operation. 

“The higher earnings were mainly driven by the prompt resumption of its construction work progress and higher earnings from the property segment,” the analyst wrote. 

HSL’s construction division posted a profit before tax due to the higher revenue of RM114.81 million. 

MIDF is of the view HSL’s current order book of about RM1.8 billion is expected to provide earnings momentum for the group moving forward. 

This is mainly due to the prompt resumption of business operations and implementation of catchup strategies to ramp up progress in FY21, leading to potential higher progress billings. 

The group’s Miri Wastewater Project, for instance, is at its tail-end, while more than two-thirds of the Package Seven for the Pan Borneo Highway has been completed. 

HSL is targeting RM400 million to RM600 million worth of new orderbook replenishment in FY21.