HSL ... Jun10

According to Hock Seng Lee’s(HSL) announcement with Bursa Malaysia, HSL in consortium with Matrik Bestari Sdn Bhd (“the Consortium”) has received a
Letter of Acceptance from Jabatan Kerja Raya, Sarawak for the project known as “Construction and Completion of an access road linking technology park
Samarahan to Tanjong Bako, Kuching” at a contract sum of Ringgit Malaysia Seventy Two Million and Five Hundred Thousand only (RM72,500,000).

Highlights
Road and Bridges project - Hock Seng Lee in consortium with Matrik Bestari Sdn Bhd has won a road and bridges construction contract worth RM72.5 million for the
construction and completion of an access road linking technology park Samarahan to Tanjong Bako, Kuching. The project is scheduled to be completed by December
2012(with a contract period of 30 months).

The scope of works - According to Hock Seng Lee’s filing with Bursa Malaysia, the consortium will undertake the works of :
- Design and supervision
- Earthworks
- Drainage and pavement
- Bridges and other related works

Joint venture structure - The consortium will carry out the works of the project as an unincorporated joint venture with HSL having Ninety Percent (90%) share in the project.

Impact on HSL Group’s bottomline – The payment for the project will be made partly in kind and partly in cash in the ratio of 50:50. This arrangement is expected to expand its existing land bank of some 600 acres for future development. Meanwhile, the contract is expected to contribute positively to the earnings and net assets of Hock Seng Lee Group for the financial years ending 2010 to 2012.

Investment Risks
Major risk factors include:
- Delay, review or cancellation of projects;
- Rising material prices that will put additional strain on margins

Valuation and recommendation
This new job has increased its order book to RM1.8 billion, of which RM1.15 billion is still outstanding. To recap, the total value of projects procured so far in FY2010is RM189 million vs our annual order book replenishment assumption of RM400-500 million. In our opinion, the project will contribute positively to Hock Seng Lee’s future revenue growth and we expect more jobs in the pipeline following the implementation of the SCORE programme and the economic stimulus packages as the group is one of the major construction groups in the state, its potential to
secure more jobs is greatly enhanced.

Maintain Buy with a higher TP of RM 1.70 from RM1.64 previously
We have increased our FY 2011 net profit forecasts by 3.5% to incorporate the project. We value the stock at RM1.70 per share, which is based on forecasted FY11 EPS of 15.5 sen and a PER of 11x. We favour HSL due to its healthy order book, strong balance sheet, leading presence in the state and steady earnings performance.