Hock Lian Seng Holdings Ltd - CIMB Research 2016-11-03: The cash box blueprint

Hock Lian Seng Holdings Ltd - CIMB Research 2016-11-03: The cash box blueprint HOCK LIAN SENG HOLDINGS LTD J2T.SI

Hock Lian Seng Holdings Ltd - The cash box blueprint

  • Net cash position and investment securities, totalling S$162.5m as at end-2Q16, formed 88% of the group’s market cap.
  • Beneficiary of Changi Airport expansion with an S$1.1bn civil engineering project to effect three-runway operations via JV with Sembcorp Design and Construction.
  • Order book more than doubled to c.S$990m since end-FY15.
  • Management expects sales of Shine @ Tuas South, the group’s on-going industrial property development, to be launched in mid-2017.

A construction company’s blueprint for strong cash 

  • The group had net cash position and investment securities totalling S$162.5m as at end- 2Q16, representing 88% of the group’s market cap. 
  • It has no formal dividend policy, but used to pay out 28-38% net profit as dividend in FY09-15, translating to 4.9-10.8% yield.
  • From our conversations with management, we understand that management is open to continue rewarding shareholders. Although no commitment is given, management said that the group has no difficulty in sustaining the dividend at its FY15 level of 2.5 Scts.

A beneficiary of Changi Airport expansion 

  • The group announced on 15 Aug that it had, through its 60%-owned JV with Sembcorp Design and Construction, secured an S$1.107bn civil engineering project to effect three-run-way operations at Changi Airport. This brings its order book to a record high of c.S$990m. 
  • Management expects the order book to keep the group busy until 2020, while noting the scope of taking in more work.

47 years’ track record in civil engineering 

  • Established in 1969, Hock Lian Seng is a Singapore-focused civil engineering group. It has two key business segments: 
    1. civil engineering and building construction, and 
    2. property development and investment. 
  • Several of its civil engineering projects were conferred “Construction Excellence awards” and recognised as landmarks in Singapore.
  • In 2007, Hock Lian Sing successfully completed Kim Chuan Depot, one of the world’s largest underground depots, for Circle Line in Singapore. 

Margins thin, but profitable 

  • Based on our conversations with several civil engineering firms, most expect the sector’s outlook to remain challenging in the short-to-medium term, noting that the industry is undergoing significant margin pressure due to 
    1. stiff competition from foreign players, and 
    2. shortage of foreign labour. 
  • The management of Hock Lian Sing believes that the group is doing a fair job in the down cycle and does not expect to run into losses (as has been the case for some smaller contractors) in the foreseeable future.

Launching Shine @ Tuas South in 2017 

  • The group has undertaken four property developments to date. Three (two industrial and one residential) have been completed and are mostly sold. The fourth, Shine @ Tuas South, is a 6-storey industrial property at Tuas South Avenue 7. 
  • With development cost of S$130m-160m (according to management), the project consists of 174 strata-titled units. Management expects sales to be launched in mid-2017 and completed in 2018.

P/BV below historical average 

  • Hock Lian Seng currently trades at 0.8x FY16F P/BV (based on Bloomberg consensus forecast), 0.8 s.d. below historical average of 1.05x. It paid a dividend yield of 6.9% in the last 12 months, vs. peers’ average yield of 4.6%.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-03
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