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Hock Lian Seng: Uncovering 5 Driving Forces Behind Record Earnings
Corporate Digest | 08 May 2015
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By: Choo Hao Xiang
Articles (151) Profile

Shareholders of Hock Lian Seng Holdings (HLS) could not be happier with how 2015 started for the construction player. HLS achieved record highs on two fronts that shareholders are most concerned about – earnings and share price.

To top it off, a final dividend per share yielding 10 percent for the latest financial year was declared in appreciation of stakeholders’ support.

The fruitful year was only one of the many reasons Chua Leong Hai was all smiles when we met the chief executive officer of HLS earlier in April.

Here are five key takeaways from our management interview on why investors should have HLS in their watchlist.

Established Track Record With Solid Clientele
With over 45 years of proven track record under its belt, HLS is one of the most established civil engineering specialists in Singapore. Its portfolio consists of domestic works of differing scales and complexities from mass rapid transit depots, expressways to sewerage facilities and airport infrastructure.

The firm is currently an A1 graded contractor in both civil engineering and general building categories. These registrations with the Building and Construction Authority allow HLS to tender for local public sector projects of unlimited contract amount. Simply put, this qualifies HLS for any large-scale projects.

Having worked with government-related bodies including Land Transport Authority, Housing and Development Board and Public Utilities Board since the 1980s, the firm has a clear understanding of what it takes to complete a job.

Coupled with solid execution abilities, “our in-depth experience and expertise as well as strong financial performance have served us well in clinching deals,” Chua said. He expanded that these were also the factors why HLS has emerged with the winning bid in multiple projects even when its bid was not the lowest.

Margin Is The Priority
The ability to protect its margins is where HLS stands firm and tall. Reflected in its profit and loss numbers, one can see that its net profit margin has been trending upwards in the five-year period between FY09 and FY13. This was achieved even as revenue slipped down to a six-year low.

Revenue And Net Margin

Source: Company Reports

The adoption of a selective approach when tendering for projects is partly why HLS was able to protect its margins amidst a challenging operating environment that is characterised by stiffer competition and rising costs.

Other profitability measures such as return on assets and return on equity for HLS also saw improvements. The notable point here is not only did HLS fared well among its peers, it managed to keep its debt-equity ratio in check, making sure that its growth is mainly financed by internally-generated funds and the company is not overly reliant on borrowings. As such, the five-year average of HLS’ debt-equity was the lowest compared to its competitors. As at end December, HLS’s debt-equity ratio stood at 0.02 times.

Peer Comparison

Source: Company Reports

Strong Balance Sheet
One key component that allows HLS the flexibility in only going for profitable projects is its huge cash war chest. As at 31 December, cash and short-term deposits amounted to $165.5 million.

“With this cash hoard on hand, we need not worry about shortfalls in working capital; or for the sake of a shortfall, tender for a deal that will not turn out well for us,” Chua explained. “More importantly, our cash pile can open doors for HLS.”

With $5 million in bank loans, HLS is in net cash position that forms about 80 percent of its market capitalisation. In other words, its closing price of $0.395 on 4 May is backed by cash of $0.315 per share.

Good Earnings Visibility
The company has been working to replenish its order book since it hit a low in September 2013. As of 28 February, its backlog has been replenished to a record high of over $450 million.

These works will keep HLS busy till 2020. Ongoing projects include the Maxwell station for Thomson Line, Stabling at Gali Batu Depot, developments at Changi Airport and the Jalan Gali Batu Depot.

Besides civil engineering works, HLS also derives income from sales of property development and rental from worker dormitory. FY14 marked a milestone for HLS as the company reaped rewards from its 2011 decision to diversify its income source by foraying into property development.

Both above-mentioned segments contributed about 78 percent and 58 percent to FY14 revenue and pre-tax profit respectively.

Its industrial properties development business has fared well, with the completed Ark@Gambas project about 91% sold while its second industrial building project – Ark@KB – has been fully sold. HLS is expected to book sales for Ark@KB in its 1Q15 results after receiving its temporary occupation permit in March.

At the moment, the company is working on a $31 million project awarded by JTC Corporation to turn a piece of land measuring 25,700 square metres in Tuas, into an industrial development.

On the other hand, sales at its 50 percent joint venture residential development, The Skywoods, have been slow due to the property cooling measures. The condominium which is more than 50 percent sold, was launched in September 2013.

“Going forward, the supportive local public construction sector outlook bodes well with HLS. From MRT and expressway projects, the continual spending by the Singapore government to strengthen the country’s transport connectivity is likely to translate to more projects for construction players,” Chua commented.

Given its vast experience and strong financial position, HLS is well-placed to capture opportunities arising from Singapore’s push to double its existing MRT network by 2030, upcoming construction of the North-South expressway and building of a third runway at Changi Airport.

Decent Dividend
Yield investors would be delighted to find that HLS has been regularly dishing out dividends since listing on the Singapore Exchange in end-2009. Between FY10 to FY14, HLS’ payout ratio ranged from 12.6 percent to 28.3 percent. In term of absolute value, dividend per share amount has increased from $0.015 to $0.04 in the same period.

A look at its cash flow statements would show that HLS’ free cash flow was in the positive territory four out of the five recent fiscal years – an indication that the cash flow HLS’s operations have been generating are sufficient to maintain its growth as well as fund dividend payouts.

As at time of writing, HLS is trading at 2.8 times FY14 earnings and a 2 percent discount to its book value.

Haoxiang manages and oversees the portfolio of stocks in the consumer goods and hospitality sectors at Shares Investment.

Please click here for more information about this author.

Hock Lian Seng Hldgs  -- -- --   
Business: [FY18 Turnover] Civil engineering (97.1%), property development (2.8%), investment properties (0.1%).

Insight: May-19, 1Q19 revenue rose 15.3% contributed mainly... Read More
Chip Eng Seng Corp  0.690 -- --   
Business: [FY18 Turnover] Property development (70.2%), construction (21.8%), hospitality (5.9%), Corporate, property investments & education (2.1%).

Insight: Feb-19, FY18 revenue increased 27% to $1.1b, contr... Read More
Lian Beng Group  0.510 -0.005 -0.97%   
Business: A construction co with integrated civil engineering & support service capabilities. [FY18 Turnover] Construction (43.6%), mfg of concrete (24.4%), ppty development (14.5%), dormitory (9.1%), investment holding (8.3%), engineering & leasing of machinery (0.1%).

Insight: Apr-19, 9M19 revenue dipped 1% due to decreased re... Read More
KSH Hldgs  0.435 +0.005 +1.16%   
Business: [FY19 Turnover] Construction (97.1%), property development and investment (2.9%).

Insight: May-19, FY19 revenue rose 51.4% largely due to sig... Read More
Wee Hur Hldgs  -- -- --   
Business: Engages in the development of real estate projects. [FY17 Turnover] Building construction (74.3%), investment property (25.7%)

Insight: Aug-18, 1H18 revenue tripled to $214.4m as a resul... Read More

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