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Hock Lian Seng: DPS of 1.8c.

Saturday, March 1, 2014

Hock Lian Seng's strong balance sheet, cash flow as well as high gross profit margin attracted me. Even if it is not a good investment for growth, I believe that it is a good investment for income with its record of paying out meaningful dividends.

Hock Lian Seng reported a gross profit margin of 40% on the back of lower revenue but higher gross profit. NAV per share improved from 24.9c to 27.8c. EPS reduced slightly from 4.9c to 4.7c, year on year.

A DPS of 1.8c has been declared. This means a payout ratio of 38.3% and a dividend yield of 6.67% based on the price of 27c a share.

Realistically, Hock Lian Seng will face headwinds in future and the management has said that:

The Group will continue to participate selectively in the some of the upcoming infrastructure projects tenders called by the Singapore Government. However, the Group is expected to face stiff competition from large foreign contractors, higher construction costs and a shortage of foreign workers.
So, although there is reason to believe that Hock Lian Seng will do reasonably well based on past track record, the landscape has definitely become more challenging.

Its exposure to property development could also be ill timed:

On the property development front, the Singapore Government has implemented property cooling measures to both the residential and industrial property market. The Group believes that the measures would create a stable and sustainable property market in Singapore.
The construction of the two industrial property developments are expected to be completed by early 2015. The joint venture residential project at Dairy Farm Road was launched in September 2013.
Having said this, now, with a PE ratio of 5.75x and trading at a slight discount to NAV, the stock does not seem expensive.

See: Full year results.

Related posts:
1. Hock Lian Seng: Buying on weakness.
2. Hock Lian Seng: Dividend 1.8c per share.


yeh said...

Hi I am one of the hock lian seng too. Just vested today!! Qing for 255,26 didn get. So today tried at 265 then I get it...hehehhe.

Hope you are doing fine. Ak!

AK71 said...

Hi yeh,

I became a shareholder in the middle of 2010. So, it has been almost 4 years. Time flies.

Over the years, the lowest price I paid was 24c a share while the highest price I paid was 30c a share.

Already collected a few rounds of dividends. I think I am doing OK. :)

yeh said...

btw, i just bought today. so i entitled to the coming devidend 1.8C? heheheh....

AK71 said...

Hi yeh,

Is the counter still trading CD? If it is, then, yes. :)

yeh said...

i checked yes! hehehe.
btw AK, just curious to ask.
why you don not invest in blues eg 3 Telecoms, Semb corp or banks?

any reason behind?

AK71 said...

Hi yeh,

Mainly because I have not done enough research on them. ;p

However, from a top down perspective, I am rather interested in the banks as a rising interest rate environment will benefit their earnings, all else remaining equal.

The telcos, I am less sanguine because I feel that their revenue are under threat. WhatsApp anyone? M1 is probably more vulnerable than the other two telcos. Again, a top down perspective.

SembCorp is a good company but, being a conglomerate, is rather complex to analyse. Based on just the PE ratio, I don't think its stock is cheap at the moment. It is probably fairly valued.

Capricon said...

Hi AK, yeh,
I am in IT industry and I agreed with AK's views in telco. It is one business that I realized that to increase subscribers unless you are the cheapest ! Pathetic ! 羊毛出在羊身上simply ask ourselves, are you paying more or paying less yearly ? It had become a viscous cycle that suppliers undercutting each other. Same for the telcos, each undercutting each other and this is at the expense of quality, just like SMRT. difficult to sustain in my opinion.

If the kopi increased10cts, I am pretty sure next day you will still go back. But telco is different, you can swing around.


BeeT said...

Hi AK,

I have been reading your blog for a few years now. Thanks for sharing your knowledge over the years.

Hmm, I am wondering for Hock Lian Seng, I saw that their revenue has fallen on an annual basis over the past 5 years. Does this concern you?

I agree that they have a strong balance sheet and management seems to have good eye for cost control unlike Yongnam but ultimately a company's sustainability depends on their revenue.

I will like to stress though my opinion is based on fundamental data rather than any qualitative analysis. Will appreciate your insight since you have owned this stock for a few years now. Cheers!

AK71 said...

Hi BeeT,

If I were investing for growth, I would be very worried.

Hock Lian Seng has been faced with stiffer competition from foreign contractors in recent years. It seems to me that they rather maintain relatively high margins than to be more aggressive.

However, as the government pushes out more projects from now to 2030, Hock Lian Seng should get its share of the pie. For example, Changi Airport awarded a $105.5m contract to them just last month.

I suspect that Hock Liang Seng will be able to continue paying meaningful dividends to shareholders for many years to come, maintaining a 40% payout ratio.

At 27c a share, it is trading at a slight discount to NAV and if we apply an industry average PE ratio of 8x, it is rather undervalued.

Even if we price in the lack of growth, at 27c a share, I don't think it can be considered expensive. Maybe, we can say that it is fairly priced.

AK71 said...

The Board of Directors of Hock Lian Seng Holdings Limited (the “Company” ) is pleased to announce that Hock Lian Seng Infrastructure Pte Ltd, a wholly-owned subsidiary of the Company has been awarded Contract T223 from Land Transport Authority for the Construction of Maxwell Station for Thomson Line (the “Project”).

The contract sum is approximately $221.8 million.

The Project will commence in April 2014 and is expected to complete by December 2020.

The Project is not expected to have a material impact on the consolidated net tangible assets per share and consolidated earnings per share of the Group for the financial year ending 31 December 2014.

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