HLS Analysis – Part 3

In this post, I will touch the on SWOT analysis, competitor analysis and intrinsic value of the company.

SWOT Analysis

Competitor Analysis

The closest competitor that I found to HLS is OKP. OKP is involved in the infrastructure business just like HLS.

Intrinsic Value

Currently, IV >> stock price. HLS is very undervalued. Also note that cash per share stands at $0.30 and is almost the current share price.

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11 thoughts on “HLS Analysis – Part 3

  1. Hi!

    I have previously visited your site and left a comment that I was amazed that you have selected several of the same stocks as me for my six share Singapore porfolio. (I have a total of 35 stocks in my portfolio) I am also a dedicated value investor. So when I saw your analysis of construction companies I decided to look into it. These companies are very interesting, however I decided not to invest for the following reasons.

    1. HLS.

    Firstly the company does not have a long track record since it is a fairly new listing. Annual reports and detailed financial data are not available except for the last year. Although the company shows good growth in revenue and profits over the last few years, this has slowed down in first half 2010. If you adjust the first half eps figures for 2009 and 2010, excluding non recurring items you end up with 2.26 cents for 2009 and 2.17 cents for 2010. This means that eps has actually fallen on a real adjusted basis and has not increased as shown in the companies first half statements (first half 2010 eps reported as 3.0 cents)

    Another factor is that the company has only about three large projects. There have been no new projects booked recently and the order book has declined from S$574.4 million at end 2009 to S$464.5 million at end of July 2010.

    This indicates to me that the company is likely to report a decline in eps for full year 2010. In addition there is the risk that the company will not book any more projects soon.

    So in conclusion I decided not to invest in spite of the low PE.

    2. I then looked through some of the other companies and analysed OKP.

    I liked OKP more than HLS since it has a longer track record of good growth. In addition the company has a lot of smaller projects rather than just a few big projects and receives about 20% of revenue from maintenance projects which provide income stablility.

    However profits at OKP have also slowed in first half 2010 and full year eps may not be any higher than last year. The order book appears stable with $327 million at October 2010 compared to $316 million at October 2009.

    In the end the reason I have decided not to invest in this company is because the company is too dependent on income from just one business area, which is road construction and gets most work from the Singapore government. For several years the company has had a stated goal of expanding into the oil and gas sector and to expand abroad, but so far very little progress has been made in this strategy. No oil and gas projects have been booked in the last year or so. In addition the only overseas projects appears to be some possibility of work in Angola, Guinea and Zimbabwe…which are three of the most politically unstable and dangerous contries in the world. I question managements judgement in going into these countries.

    So, following Warren Buffett’s first rule, never lose money, I have decided not to invest in either company although they both appear ‘cheap’ and well-managed.

    I look forward very much to hearing of any other investment ideas you may have, since you definitely think along the same lines as me.

    Graeme

  2. Hi Graeme,

    Yes, I do remember you! Woah you have 35 stocks in your portfolio?! That’s impressive! How do you manage to keep track of all the financial results of those companies? Also, care to share some of the stocks that you have?

    What you said of HLS is true. They don’t have a track record as they listed only very recently. I invested in HLS due to the sole reason that they have won many MRT contracts from LTA and are poised to do so for the future construction of MRT lines. MRT lines are set to double by 2020. I see growth in that. With cash per share standing at $0.30 and no debt at all, I thought the risk is limited. You have mentioned that HLS’s order books has been declining. I think the reason is because LTA has not awarded the contracts for the upcoming MRT lines yet and they are set to do so soon. I think HLS will win some major contracts.

    I wasn’t comfortable with OKP as they mainly have smaller contracts and have not done any MRT projects on their own. They have only done so with joint ventures and their projects are not large as HLS’s. Also, I wasn’t comfortable with OKP going into the unstable African countries like what you have mentioned. Looking at order books, OKP has a smaller order book than HLS.

    Looking forward to hear from you!

  3. Thanks for your reply. I am going to keep following both of those companies to see how things progress. If things go well for HLS concerning MRT contracts I may well decide to invest later…but of course I would have to pay the penalty of a higher purchase price for waiting…

    How do I manage thirty five stocks? Well many of my stocks are core holdings like Pepsico, Nestle, Johnson & Johnson, Wall Mart, Tesco, Becton Dickenson etc. These stocks are long term positions and so I don´t need to follow them so closely.

    I mainly need to keep up with what is happening with the mid cap and smaller cap stocks in my porfolio. It is true that it is difficult to keep up with so many stocks, but I think the advantage of greater diversification makes up for this. I invest in several european markets as well as the US, Singapore and Hong Kong.

    I would be happy to let you know a few of the stocks I think are very interesting right now. But of course you would be doing your own research to check these companies out fully and you may well reach a different conclusion. Are you able to buy stocks on the Italian or Netherlands markets. If so I can mention some interesting possiblities if you write to my email address;

    redpaksun@yahoo.com

    Cheers

    Graeme

  4. Hi FFN,

    I have been vested with HLS for about half a year now. Added at .265, .30 and .29. Thanks for your analysis, read it with great pleasure. Reaffirms my points that it is fundamentally sound but would require a downtown line 3 project to get its share price re-rated.

    P.S i read that the tender results/closing of the tender will be out by end 2010 just fyi.

    Thanks!
    Gab

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