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

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.

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.

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.

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.

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.

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