Hock Lian Seng Holdings (HLSH SP) - UOB Kay Hian 2017-02-16: Cashing In On Government Spending

Cashing In On Government Spending - UOB Kay Hian 2017-02-16: Hock Lian Seng Holdings (HLSH SP) HOCK LIAN SENG HOLDINGS LTD J2T.SI

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.

Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-16
UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 0.69 Same 0.69