Hock Seng Lee (HSL) reported 3QFY20 bottom line growth of -25.3% YoY to RM10.9m on the back of 7.3% decline in top line to RM161.2m. Consequently, its 9MFY20 net earnings slipped by 50.4% YTD to RM22.3m as revenue dropping 28.1% YTD to RM356.6m. The lackluster performance was mainly due to lockdowns and movement restrictions globally particularly in the 1H of the year due to Covid-19 pandemic, resulting to the disruptions on its operations as well as the material supply. Profit margins contracted 3.8ppt and 2.8ppt at gross and net levels attributed to the rise in all operating costs as stricter operating procedure has been implemented amid low productivity level. The results were broadly in-line with our and consensus expectation, meeting 70% and 67% respectively of full-year FY20 earnings expectations. We foresee that it will reporting the same profit in 4QFY20 hence no change in our earnings forecast. With all negatives have been priced-in, we upgrade our call to Neutral with an unchanged TP of RM0.92. Our TP is based on its 5-year average PER of c.11x over FY21 EPS of 8.4sen.

• QoQ improvements. The Group reported strong improvements on a QoQ basis given pick-up in construction activities after facing major disruptions across the supply chain during the global lockdowns and movement control order (MCO) period that limits the material supply chain as well as the need to stop operation immediately. Revenue and net profit surged 94% and 175.4% QoQ with notable contribution from its construction segment (+99.2% QoQ).
• Profit margins contracted. Profit margin at gross, pre-tax and net level fell 3.1ppt, 3.3ppt, and 1.6ppt YoY as rise in all operating costs as stricter operating procedure has been implemented amid low productivity level. Nevertheless, slight improvement has seen on QoQ basis (1.0ppt, 1.6ppt, and 2ppt) as activities resume.
• Expecting the same results for 4Q. With productivity is still at roughly half of normal, we foresee HSL will be reporting the same earnings in 4QFY20 as this quarter. This is in spite of the reenforcement of 19-days CMCO IN Kuching after reported more than 150 cases as work progress are still continue. Recap, the Government has re-enforce the conditional MCO in Kuching, Sarawak from 9th to 27th Nov. Nonetheless, we foresee the CMCO will not be extended further as the new cases are reduce to only two as of 25 Nov. The Group’s outstanding orderbook remains healthy at RM2bn with no project cancellation thus far.

Source: PublicInvest Research - 27 Nov 2020