Hock Lian Seng Holdings (HLSH SP) - UOB Kay Hian 2017-05-11: 1Q17 Earnings Pick Up As Expected

Hock Lian Seng Holdings (HLSH SP) - UOB Kay Hian 2017-05-11: 1Q17 Earnings Pick Up As Expected HOCK LIAN SENG HOLDINGS LTD J2T.SI

Hock Lian Seng Holdings (HLSH SP) - 1Q17 Earnings Pick Up As Expected

  • After the pleasant 4Q16 surprise, Hock Lian Seng delivered positive 1Q17 results, in line with our expectations. 
  • Discounting previous year’s JV contributions, pre-tax profit would have jumped 38.8% yoy. 
  • The outlook is still bright with a S$915m civil engineering orderbook leading to 3-5 years of earnings visibility. Construction of its Tuas property has also commenced. 
  • Maintain BUY with a target price of S$0.585, adjusted for the special dividend, and still based on 7.6x ex-net cash 2017F PE.



RESULTS


1Q17 results in line. 

  • Following the pleasant surprise in 4Q16, Hock Lian Seng (HLS) delivered positive 1Q17 results, in line with our expectations. Civil engineering revenue increased by S$4.4m (+18.7% yoy) from the commencement of the Changi Airport JV project. 
  • Contributions from property development and investment properties remained non-existent or insignificant. 
  • Gross profit jumped by S$1.0m (+68% yoy) with higher sales from civil engineering projects. Discounting the S$1.1m share of JV results in 1Q16, pretax profit (PBT) would have jumped 38.8% yoy instead of dropping 13.3% yoy.
  • Nonetheless, 1Q17 earnings made up only a small portion of full-year earnings as 1Q is traditionally a weak quarter.


STOCK IMPACT


Earnings visibility still high with orderbook at around S$915m. 

  • Outlook continues to be bright with HLS maintaining a high orderbook of around S$915m, coming from the Maxwell station, two airport projects and Stabling at Gali Batu Depot. This should continue to give HLS an estimated 3-4 years of earnings visibility. 
  • For new wins, management has also placed bids for new projects worth of hundreds of million dollars.

Construction of industrial development property commenced. 

  • Construction of the group’s new industrial development property at Tuas (Shine@Tuas South) has commenced and is expected to be completed in 2018. 
  • While there are signs of an upturn in the property market, we opt to be conservative and give zero value to its property development business as uncertainties remain in the property market.


EARNINGS REVISION/RISK

  • No change to forecasts. 
  • We maintain our net profit forecasts for 2017 and 2018 and note the upside risks to our estimates in terms of property development profits and new contract wins.


VALUATION/RECOMMENDATION

  • Reiterate BUY and target price of S$0.585 (adjusted for 12.5-cent dividend). 
  • After paying dividend of 12.5 cent/share, we adjust HLS’ 2017F net cash balance to S$158.5m.
  • Based on 7.6x ex-net cash 2017F PE, our adjusted target price is S$0.585, pegging its civil engineering segment at SGX-listed construction peers’ average PE.


SHARE PRICE CATALYST

  • New contract wins (ie North South Corridor).
  • Successful sales of property development projects at reasonably profitable prices.




Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-11
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.585 Down 0.690



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