HLS Analysis – Part 1

I will present my analysis on Hock Lian Seng in a few parts. The first part will cover the overview and financials of HLS. The second part will touch on the qualitative analysis of the company and the third and last part will touch on the SWOT analysis, competitor analysis and intrinsic value of the company.

Overview of business

HLS is involved in two business segments, namely, the civil engineering segment and building materials segment.

Under the civil engineering segment, the company carries out civil engineering works for bridges, expressways, tunnels, MRT, port facilities, water and sewage facilities and other infrastructure works for both the public and private sector. A number of these projects have been conferred “Construction Excellence” awards and are recognised landmarks in Singapore. The major customers of HLS include government and government-related bodies of Singapore, such as the LTA, the HDB, the PSA, the PUB and the CAAS. It is worthy to note that HLS built the Kim Chuan MRT Depot, the largest underground depot in the world in 2007.

Under the building materials segment, HLS procures and sells building materials, namely, concreting sand and aggregates, for building and construction purposes mainly for Singapore public sector contracts. The building materials are sourced from different suppliers locally and overseas but the main sources of supplies are from Malaysia and Myanmar. HLS mainly sells concreting sand and aggregates to the HDB.

Financials of HLS

Note: FY2006 to FY2008 are from pre-listing years. HLS was listed only on 21 Dec 2009.

The revenue, gross profit and net profit of HLS are increasing consistently throughout the years. However, the GPM and NPM are low.

Looking at the balance sheet, the cash stands at $143.7 million. The company doesn’t have any debts at all. The current ratio is at a healthy level of 1.5.  ROE is above 20% at 28.66% and ROA is above 7% at 10.7%. The retained earnings and equity are increasing consistently.

Going on to the cash flow statement, the cash flow from operations for FY2009 stands at $76.7 million with very low capex requirements.

The company has been paying dividends since FY2007 and the dividend yield is at 4.84% which is an acceptable yield for me.


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7 thoughts on “HLS Analysis – Part 1

  1. Hi

    I have a question regarding the balance sheet of HLS. In 2009, the bulk of the current liabilities is the “Progress billings in excess of work-in-progress” which accounts for 61million out of the 124,483million of current liabilities.

    i dun understand when the company should credit to this account, is the account something like unearned revenue ?

    • Hi b,

      Firstly, thanks for popping by my blog!

      “Progress billings in excess of work-in-progress” is placed under current liabilities as the company hasn’t paid the payment for the clients yet as the projects are still currently being carried out. They make the payment in stages of completion of project.

      If you want to look at “unearned revenue”, it is under current assets -> contract work in progress. This is when the work is still in progress and revenue will be recognized in stages of project completion.

      Hope this helps.

  2. hi ffn

    thanks for the explanation. so basically, the company still have use up cash to pay for this liability. thus to be prudent, shouldn’t we minus off this amount from the $149,700 worth of cash as at 30.6.2010 . hence the cash per share will be lower resulting in a lower margin of safety

    • Hi b,

      Cash is cash no matter whether you have to pay debt or any liability. Take a personal example, let’s say you have $10,000 in your bank but you need to pay $1,000 one year later to your friend. You still have $10k in your account no matter what.

      When you say you need to minus liability from cash, I think you mean net asset value (total assets – total liability). NAV is what is left when the company is liquidated. Thus, cash/share is still $0.30 no matter what liabilities they have. Some people calculate net cash per share which is cash minus off debt divided by number of shares outstanding. Since HLS has no debt, net cash and cash is the same.

      Hope this helps..

  3. Hi ffn

    yep. i was refering to the NAV. guess i mix up cash per share with NAV. but my question is that won’t NAV be a better and more conservative way to determine the margin of safety for a company instead of cash per share since as shareholders, we should be more concern with the liquidation value as we are ‘paid’ last after creditors and bondholders etc..

    as such, for HLS, the price to book is 2x , so margin of safety is not present in terms of NAV ?

    regards
    B

  4. Hi b,

    Yes, I was just referring to cash per share and said that currently, when u purchase HLS, you are just changing $1 for $1.

    NAV will be a better way to find intrinsic value for REITS but not for companies that promise growth through cash flow. When you want to assess company through NAV, you assume the company won’t grow in value.

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