KUCHING: The research arm of Kenanga Investment Bank Bhd (Kenanga Research) may cut earnings estimates for Hock Seng Lee Bhd (HSL) pending its 2017 second quarter results (2Q17) due today.
In a recent note, the research arm explained that they had just returned from a meeting with HSL senior management where they were updated on the progression of its Pan Borneo project and Kuching Wastewater Management system construction.
The two awards make up the lion’s share of the group’s current RM2.9 billion outstanding orderbook at 63 per cent. And as such, their progression would be huge determinant to any re-rating catalysts for HSL.
The main concern for Kenanga Research was the lack of work progress for the group’s Kuching Wastewater Management System project.
“We understand that work progress is currently minimal despite HSL securing the contract award last year as they are in the midst of ironing out further details in relation to the in-site ground conditions with the client.
“This has led to the project timeline being pushed back and is a negative surprise to us given that it would mean less contribution in FY17-FY18 versus our expectations – leading to some downside risks towards our FY17-18E earnings,” said the research arm in a note.
Should they decide to push back the Kuching Waste Water project by a year, Kenanga Research expect their estimates for HSL’s FY17 and FY18E core net profits to come down by 6 and 9 per cent or RM56 and RM70 million, respectively.
As for HSL’s Pan Borneo project, current work progress is on track at circa 10 per cent, but meaningful contribution will only be seen in the second half of 2018.
Meanwhile, HSL’s property segment seems to be doing well with the group’s two subprojects within its La Promenade site – Precinct Premier and Precinct Luxe.
The initial two phases of Precinct Premier comprises of 68 detached bungalows, semi-d’s and quadruplexes which have a total gross develop value (GDV) of RM113 million.
Precicnt Luxe on the hand will comprise of 112 super link homes with premium facilities at a total GDV of RM105 million.
“Of above, Phase 1 of Precinct Premier has reached the practical completion and is expected to hand over to buyers tentatively by the first week of September.
“Phase 1 of Precinct Luxe is at the advance stage of completion and is expected to be completed by the end of 2017. All other phases of Precinct Luxe are progressing well.”
Currently, HSL’s unbilled property sales stand at RM150 million and provides the group with a two to three year earnings visibility.
All things considered, Kenanga Research will maintain its ratings of HSL at a ‘market perform’ call and target price of RM1.50 based on an unchanged price earnings ratio of 11 fold.