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Hock Lian Seng: 2c dividend per share.

Thursday, February 23, 2012

On 17 October 2011, I looked at Hock Lian Seng's numbers after observing how insiders were buying up its shares at 23.5c a piece. I decided that its numbers were decent enough and that it would probably be able to pay a dividend of 1.5c a share.

I bought more shares at 24c a piece while waiting to see if price would fall closer to its NAV per share. Prices did go lower and touched a low of 21c in one later session but my buy order was not filled.

Today, it announced a dividend of 2.0c a share on the back of rather encouraging numbers. Mr. Market has reacted in the usual fashion and Hock Lian Seng's share price touched a high of 27c before closing at 26.5c today, up 1.5c from the preceding session.

I really like how its gross profit margin improved to 24.9% and its nett profit margin improved to 19.0%. Construction firms having thin margins is common knowledge amongst seasoned investors and being able to improve on their profit margins says something about the strength of Hock Lian Seng in the sector.

Of course, as investors, we own shares and we want to see if we are now in better shape on a per share basis. Well, EPS improved 15.1% to 6.1c. No doubt, this is one reason why a much higher dividend has been announced. 2c per share represents a payout ratio of 32.8%.

Hock Lian Seng will gun for more infrastructure projects in Singapore amidst greater spending by the government in this area. If they are successful in their endeavours, the company would be able to ride out the mild slowdown in the economy which is being forecast for the coming years.

See press release: here.

Related post:
Hock Lian Seng: Insider buying.

32 comments:

iPadCaseReview said...

whoa tts 20% plus gain ! congrates

Ray said...

2 cents DPU on a price of 0.27 per stock.
That's a decent 7.4% div yield!
wow...

AK71 said...

Hi iPadCaseReview,

I guess paper gain + dividend is about there. Thanks. :)

AK71 said...

Hi Ray,

Hock Lian Seng has a consistent dividend payout policy. If it could demonstrate that its earnings are resilient even in the cyclical industry it is in, it could be a reliable passive income generator. In this respect, it would be a stronger option than S-REITs since its payout ratio is under 40% while REITs pay out 90% or more of their income.

INVS 2.0 said...

Hi Ak71,

Wow, didn't know there are passive income stocks for non-REITs. 2c per 0.24c is much attractive than AIMSAMPI!

But is it more or less stable than REIT?

AK71 said...

Hi INVS 2.0,

Of course, there are non-REITs which are great passive income generators. Two such stocks which I have been holding for years are ST Engineering and SPH. These blue chips are very reliable sources of regular passive income for investors.

REITs could be more attractive because of high distribution yields but we have to compare REITs and stocks objectively.

For example, Hock Lian Seng's dividend yield might be lower than AIMS AMP Capital Industrial REIT's distribution yield but its payout ratio is very much lower. Whether Hock Lian Seng would be able to maintain its dividend per share yearly is something else. Only time will tell. ;)

Ray said...

Hi AK,

I don't quite get it when you compare HLS's 40% DPR with REITs' 90% POR.
Care to enlighten?

AK71 said...

Hi Ray,

Hock Lian Seng paid out some 33% of its earnings as dividends. S-REITs distribute at least 90% of their income to unitholders.

If a 33% payout ratio could give us a dividend yield of 7.4%, imagine how much it would be if Hock Lian Seng were to pay out 90% of its earnings. ;)

Ray said...

but they wouldn't pay out 90% like REITs. The business models are different. In fact, businesses in Singapore don't seem to grow in their DPR. e.g. SPH's DPR stayed the same all these while.

AK71 said...

Hi Ray,

I am not suggesting that Hock Lian Seng would start paying out 90% of its earnings although I know ST Engineering was paying out 100% of its earnings as dividends to its shareholders for many years. ;)

I am merely saying that if we can get a dividend yield of almost 8% from a payout ratio of only 33%, isn't that a better investment than many S-REITs with similar distribution yields but achieved through a minimum of 90% payout of their incomes?

Mind you, I still like REITs as income instruments but I also like high yielding stocks like SPH and ST Engineering. Hock Lian Seng seems like another likely candidate. ;)

Ray said...

I see your point. Thanks AK.

INVS 2.0 said...

Hi Ak71,

ST Engineering pays 100% but its DPU is only 5%?

AK71 said...

Hi Ray,

Having said all that I have said, it is hard to dispute that S-REIT's income streams are more predictable than Hock Lian Seng's earnings.

Is Hock Lian Seng able to grow its order book and maintain its higher margins on a yearly basis?

Most would still go with the likes of SPH and ST Engineering if they should invest in Singapore stocks for income.

My investment in Hock Lian Seng is about 1.5% of my portfolio. I might add more if its share price were to weaken. It looks promising but I will only add with a greater margin of safety. :)

Ray said...

Yes, my thoughts exactly too.
I was contemplating adding HLS today but based on NAV alone, it is quite expensive at the moment.

Also, like you and LP mentioned, the cyclical nature of this company as well as their thin margin, i am not so comfy with it at this current price :)

But thank you so much for sharing your thoughts. Learnt alot from you.

AK71 said...

Hi INVS 2.0,

I started investing in ST Engineering at $1.55 donkey years ago. The last time I bought any ST Engineering shares was in early 2009 at $2.44 a piece.

For many years starting from the time I was a shareholder, its payout ratio was 100%. I believe it has become 90% in recent years.

It just announced a dividend of 12.5c per share. Dividend yield is hardly exciting for those buying in now. For my investment, the yield would be from 5.1% to 8.06%. This is pretty decent especially if we take into account my paper gains. Buying on weakness is the only way to go.

OCBC Investment Research: ST Engineering, 24 Feb 2012.

AK71 said...

Hi Ray,

One reason why I am more comfortable with Hock Lian Seng and Yongnam now is because the cyclical nature of construction businesses could be ameliorated with greater spending on infrastructure projects by regional governments.

As Asia embarks on improving its infrastructure, bigger players with the relevant advantages could well benefit in a more sustainable manner.

The amount of construction going on in Singapore could easily keep our construction companies chugging along till 2015, for example.

Like you, I am still learning and I only hope that I have not done more harm than good by sharing my ideas here. So, don't thank me yet. ;p

INVS 2.0 said...

Hi Ak71,

I still prefer REITs for its stability and high payout. I have the history of losing money in cynical stocks when I first started out. :)

Current prices for REITs are on the high side, though.

INVS 2.0 said...

...continued

But to give a benefit of doubt, construction firms are having a boom time nowadays. Just look at the number of road projects alone, on one motoring.com. Residential projects are massive too. :)

AK71 said...

Hi INVS 2.0,

Ah, bad experience. I see.

Well, do what you feel comfortable with. Certainly, there is nothing wrong with investing in REITs for income especially in a low interest rate environment.

REITs have had a stabilising effect on my portfolio over the last few years. It has made my portfolio more resilient to shocks.

REITs lower portfolio risk.

INVS 2.0 said...

Hi Ak71,

So far, I have only 2 counters, both are stable. I plan to invest in only 1 counter, AIMS, but to lower my chance of a huge loss, I am limiting my investment funds, maybe only 30-40% invested instead of the whopping 90% last year. Fingers crossed. :)

AK71 said...

Hi INVS 2.0,

It depends on how much risk are you able to live with ultimately.40% invested sounds like a nice compromise. :)

Howyuan said...

I agree that construction companies are having an eureka period due to big spending by respective governments in Asia. One company i like is OKP.

I am also looking at some mid-size construction companies listed on Bursa Malaysia, and i noticed that their margin are trending lower despite the large number of projects ongoing. Cause of concern?

AK71 said...

Hi Howyuan,

Thanks for the heads up on OKP. :)

Yes, I would be concerned if margins keep eroding. Not a healthy picture.

SnOOpy168 said...

Malaysian projects often involved "indirect cash expenses" @ many layers of the decision process. perhaps it's their way of doing business which us goody sillyporeans would not dare to touch or think about. Perhaps Calvin would differ my opinion.

AK71 said...

Hi SnOOpy168,

I am familiar with how Malaysian (and Indonesian) companies conduct business.

Unfortunately, unless we are in the companies' inner circles, we have to depend on numbers publicly available and hope that they are good enough to benefit common shareholders. ;)

Howyuan said...

Not sure if it is correct, but AMfraser ran an article comparing SGX's highest net cash companies, and HSL leads with $0.328/share. That was in Jan2012.

If so, WOW!

AK71 said...

Hi Howyuan,

Yup, I read that on NextInsight. In case anyone is interested, here is the link:

The most cash rich stocks are...

Ray said...

Hi AK,

Any thoughts abt HLS?

AK71 said...

Hi Ray,

Still a rock solid company, imo. We could also see a positive reaction by Mr. Market if the company moves fast enough to launch a strata titled industrial project on a land parcel measuring approximately 13,072 square metres at Kaki Bukit Road 5 / Kaki Bukit
Avenue 6. It paid S$27,303,784 on 19 June 2012.

This is, however, a wild card as it is a shorter 30 years leasehold property, probably the first of its kind. It is hard to say how investors would take to it. Have to wait and see.

Ray said...

yeah, i thought it was strange that the price fell after HLS announced it won the tender of kaki bukit on 21 June.

I wonder why... :)

AK71 said...

Hi Ray,

Well, they are taking on some risk doing this. It will draw upon its cash and there is likely to be borrowings. So, I suppose Mr. Market is saying he will buy only with a greater margin of safety.

Will have to see how successful the launch is going to be. There is still a craze for strata titled industrial properties although there is a minimum size per unit imposed now. Of course, this is a relatively shorter lease property as well.

My guess is that the launch would take place within the next 9 months or so. Just have to wait and see. :)

AK71 said...

Hock Lian Seng, TA Corporation, King Wan Corporation and Far East Distillers have been jointly awarded a S$244.3m Dairy Farm Rd residential site, which is proposed for development into a mid-range condominium of ~400 units.

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