Cashing In On Government Spending - Hock Lian Seng Holdings (HLSH SP)
- With mega infrastructure projects pushing civil engineering demand, Hock Lian Seng Holdings (HLS)’s record high orderbook, which already boasts 3-5 years’ earnings visibility, is set to grow further.
- The 47-year-old company has wide-ranging expertise in government projects with a robust 2017F net cash of S$209.9m, or a whopping 80% of market cap.
- Initiate coverage with a BUY and target price of S$0.69, based on 7.6x ex-net cash 2017F PE.
- HLS offers a 2016 dividend yield of 4.9% with potential for more.
- We initiated coverage on Hock Lian Seng Holdings (HLS).
Mega infrastructure projects to push civil engineering demand.
- The Building and Construction Authority announced public-sector contracts would grow to S$20b-24b in 2017 (2016: S$15.8b), pushing construction demand to a new high. This is supported by several mega infrastructure projects, including the North-South Corridor (Singapore’s first integrated transport corridor/expressway) and expansion of the MRT network.
- We also note the possibility of further infrastructure spending in the upcoming Budget 2017.
Record-high orderbook, providing 3-5 years’ earnings visibility and set to grow further.
- With the most recent S$1.1b Changi Airport contract win (through 60%-owned JV), HLS’s civil engineering orderbook is estimated to reach a record high of S$963m, nearly 3x that of 2015’s.
- This enormous orderbook provides earnings visibility for the next three to five years and is set to grow further as the company continues to bid for new projects.
47-year-old company with wide-ranging expertise in government projects.
- HLS boasts > 45 years of experience in taking on a wide range of civil engineering projects from expressways to bridges, and train depots to MRT stations. It is able to tender for unlimited value in public-sector projects and has won numerous excellence and safety awards.
- Other than its valued expertise, its strong financials also give it an edge in securing tenders.
Robust 2017F net cash of S$209.9m expected, or 80% of market cap.
- HLS’s 3Q16 net cash stood at a whooping S$190m, excluding around S$11m worth of JV profits.
- Even taking into account the required cash outflow for property developments and dividends, we expect net cash to hit S$209.9m by 2017, or 80% its current market cap.
2016 dividend of at least 2.5 S cents/share (4.9% yield) with potential for more.
- In view of its huge net cash and dividend track record, we opine the company is highly likely to maintain its previous dividend of 2.5 S cents/share, or 4.9% yield.
- We note management has been shareholder-friendly and with little investment opportunities for the excess cash, they could return cash to investors to unlock value - signaling corporate governance and improvements in ROA and ROE.
- Initiate coverage with a BUY and target price of S$0.69, based on 7.6x ex-net cash 2017F PE, implying 34% upside.
- For Hock Lian Seng (HLS), we value its civil engineering segment at S$140.1m based on peers’ average PE multiple, while we conservatively assign zero value to its property development segment.