Divestment of Hock Lian Seng

I have divested HLS last week after much deliberation. I purchased it in October 2010 and sold it at a slight loss. Luckily, my stake in the company was just a small part of my portfolio. The reasons for divestment:

1. Order book has been declining ever since I purchased the company. Order book at time of purchase was at $464 million. Order book at end of FY2010 was at $350 million. The current order book (as of 2nd Quarter 2011 ended 30th June) is at $272 million which is mainly from the balance works from Jln Gali Batu Depot and Marina Coastal Expressway projects.

HLS has not won any contracts for the latest Downtown Line Stage 3 and the last contract was given on 29th August 2011. The order book almost halved since my purchased. Even though they might win contracts for the future MRT lines such as Thomson Line or Eastern Region Line, there is too much competition with foreign firms from Korea, China and Japan entering the fray. Many Downtown Line 3 contracts were awarded to these foreign firms.

In the latest quarter report, CEO Mr Chua admitted that there’s intense competition in the market. Due to the dip in order book and also due to lower progress billings, revenue for latest quarter dipped 32% and net profit dipped 37%.

2. I also divested to pave way for some cash to purchase companies that are cheap/will become cheap due to the economic uncertainties. If I had not sold, there will be an opportunity cost of holding on to HLS when there are better companies out there.

Only time will tell if I made the right decision but nonetheless, I will take this whole episode as a learning experience.

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Update: HLS Order Book 1Q2011

HLS just released their 1Q2011 report yesterday.

Their order book stands at S$307 million as of 31st March 2011. It mainly consists of the balance of work for Jalan Gali Batu Depot and Marina Coastal Expressway project. No new contracts were won from Downtown Line 3 project. I’m kind of disappointed with the order book as it dipped further and will keep a close lookout to see if they win any Downtown Line 3 contracts in the coming months.

HLS Order Book

A fellow investor friend, Wan, pointed out an article in Kevin Scully’s blog on Hock Lian Seng’s order book and the potential for the order book to grow. A very big thanks to him for pointing out this article. The order book of HLS has been a concern for me ever since the release of FY 2010 results. The order book of HLS has been decreasing from around $460 million when I first researched into HLS to around $350 million as of Dec 31st 2010. So far, HLS has not won any contracts for the Downtown Line 3 construction and the order book has obviously decreased, partly due to this. In the article, it said that HLS is bidding for two MRT projects. They are for the Downtown 3 line (3 or 4 out of a total of 8 contracts) and Tuas extension (3 or 4 projects each worth $300 million). I have not confirmed this by counter-checking with LTA or HLS. I will keep a keen lookout for the next few quarters’ results to see how has the order book increased. I’m sure HLS will win a couple of contracts given they have a good track record with past projects. I will also have my eye on the profit margins of the contracts that may be won. For those interested to know what are the current tenders up for bidding, check out LTA’s website.

HLS FY2010 Analysis

Hock Lian Seng, a BCA Grade A1 Grade A1 civil engineering infrastructure builder and building materials supplier, released its FY10 results on 22nd Feb 2011. It posted record revenue and net profits for FY10. Its net profits surged 27% YOY.

The revenue increased by $4.2 million (1.9%) to $229.0million from $224.8 in 2009 mainly due to higher progress claims recognized from Civil Engineering segment with the construction activities of Marina Coastal Expressway and Jalan Gali Batu Depot projects picking up substantially in 2010. The gross profit margin and net profit margin improved to 13.1% and 11.8% respectively. Gross profit margin improved due to better margin from new projects.

The cash balances stands at $165.5 million with zero debt. This represents cash per share at $0.32. Current price (as of writing) is $0.295. ROE and ROA improved to 30.2% and 12.5% respectively. Retained earnings slightly less than doubled to $45.6 million.

Looking at cash flow, cash flow from operations dipped significantly to $34.6 million (2009: $76.7 million). I’m quite disappointed with this figure. The decrease in cash flow was mainly due to decrease in advance payment received from customer and increase in progress billings in excess of work-in-progress. Average free cash flow stands at $32.3 million. This shows that HLS is a good cash-generating business without any leverage.

Outlook extract from HLS FY10 press release: “The strong economic growth in Singapore has prompted the Building and Construction Authority (BCA) to be more upbeat in its forecast for the local construction demand. In its press release dated 12 January 2011, BCA projected that Singapore construction demand for 2011 is likely to be between S$22 billion and S$28 billion. BCA is also upbeat that public sector demand for construction will strengthen to between S$12 billion to S$15 billion, led by Land Transport Authority (LTA)’s Downtown MRT Line Stage 3 contracts. The buoyant construction demand for 2011 augurs well for a positive outlook for the Group.”

LTA will soon be releasing the remaining results for the tenders of DTL 3 contracts. The first two contracts were awarded on 25th Feb 2011 and they were for the construction of Bedok Town Park station and construction of tunnels between Ubi and Kaki Bukit. Both these contracts were worth $480.4 million and both were not awarded to HLS. I’m sure HLS will win some contracts when LTA releases the results in the near future. HLS was involved in both the DTL 1 and DTL 2 projects. I will keep a keen eye on the contracts won by HLS to fill up the order book. The order book has dipped from around $460 million when I first analysed HLS in Nov 2010 to the current $350 million as of 31st Dec 2010.

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.

HLS Analysis – Part 2

We have looked at the overview and financials of HLS thus far. In this post, we will look at the qualitative analysis of the company, including the future growth avenues of the company.

Qualitative analysis

Economic moat: The moat of HLS acceptable. It has won numerous “Construction Excellence” awards including one in 2010. It has also won many “Safety Awards” and has ISO certifications. It has also undertaken numerous projects for government sectors especially LTA. HLS also has the “A1” rating (the highest rating) under “Civil Engineering” category which means that it can bid for projects of unlimited value.

Competitive strengths and advantages:

  • A1 BCA rating
  • Excellent track record
  • One of the very few home-grown companies that undertakes projects for LTA without any joint ventures (shows expertise of HLS). Currently, HLS has the highest number of order books in terms of MRT contracts won.
  • Historically, company has won average of 5% of LTA contracts in terms of contract value annually
  • Strong financial position
  • Strong order book of $464.5 million as at 30th June 2010
  • Cash/share is at $0.30 which is the same as share price at time of writing
  • Lots of cash available to do acquisitions of smaller companies

Insider buying and/or share buybacks: Chua Leong Hai, CEO and Executive Chairman, holds 35.36% of the company. The company has not done any share buybacks. It should do one as the share price is depressed compared to its intrinsic value.

Future growth plans:

  • Looking into going to property investment and property development (recently released SGX announcement on this)
  • LTA contracts for the various MRT lines to be built to be won (rail line length to be doubled by 2020).
  • More HDB flats will be built to cope with demand – helps building materials segment
  • Ongoing projects till 2015 (for list of projects completed and projects currently in progress: http://www.hlsgroup.com.sg/TrackRecords.html)

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.