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Hock Lian Seng: Won a $221.8 million contract.

Monday, April 28, 2014

Despite a major contract win amounting to $221.8 million recently, Hock Lian Seng has not managed excite Mr. Market. Add this recent win to the $105.5 million win in February, Hock Lian Seng now has a very healthy order book.

If I were to hazard a guess, I would say that the lukewarm reception by Mr. Market stems from concerns about Hock Lian Seng's JV condominium development with King Wan and TA Corp, The Skywoods, which has seen a very slow take up rate. From what I know, it is less than 20% sold and it has been half a year since it was launched.

With the recent action by CapitaLand to implement a 15% discount on prices for its hard to sell Sky Habitat in Bishan, it is possible that more developers with hard to sell condominiums for various reasons might follow suit.

Analysts have estimated that The Skywoods has an average breakeven price of some $1,100 per square foot. Hock Lian Seng et. al. reduced the launch price to an average of $1,300 per square foot in September 2013, taking into consideration the more difficult conditions. So, the margin is less than 20%.



Source: www.stproperty.sg

However, given that things could get worse, prices could be dropped again. If it should be a 15% drop like what happened at Sky Habitat, then, average price falls to $1,105 per square foot. This is at break even price which means that Hock Lian Seng would spend a few years being busy on the project for nothing. In my opinion, this is an optimistic scenario and I hope that it would not get any worse than this.

So, if we think of The Skywoods as a zero contributor but, at the same time, being able to cover its own development cost (i.e. able to break even), then, we just have to focus on the rest of the business and see if Hock Lian Seng is still a good investment.

With the recent big contract wins, the civil engineering segment now has earnings visibility till 2020.  I have said a few times before that Hock Lian Seng, like Yongnam, is a natural beneficiary of the increased spending by our country on infrastructure development till 2030. So, more wins are likely in future. A stronger order book over time will overshadow Mr. Market's concerns about The Skywoods, perhaps.

Hock Lian Seng also has two development industrial properties which are mostly sold and these are due to obtain their TOPs sometime in late 2014 and early 2015. In the latest annual report, it has been stated that these will contribute significantly to Hock Lian Seng's results then.

The Skywoods is the burr in the side for Hock Lian Seng but even with a 15% reduction in asking prices, it could turn out to be a non-issue. Hock Lian Seng's business is more than just The Skywoods.

EPS, which has been declining, is likely to improve again with a healthier order book and with the obtaining of TOPs for its two development industrial properties in the next 12 months. Although a special dividend could be declared then, I would be quite happy if the conservative management continues to pay a dividend of 1.8c to 2.0c a share, which I believe is sustainable. NTA per share could increase by another 3c or so which would bump NTA per share to above 30c.

Hock Lian Seng is a sound investment for income although not a very exciting one for growth. For me, it has been a good investment so far and looks like a reasonably good investment for the future. The last time I bought more was in February this year at 25.5c a share. If share price should decline by 10% or more upon the counter going XD, I would probably add to my long position.

A 7% dividend yield? An investment that is likely to grow to be more valuable in future as NTA per share grows? Sounds good to me.

Related post:
Hock Lian Seng: DPS of 1.8c.

14 comments:

JY Chua said...

What is the skyhabitat breakeven price?

AK71 said...

Hi JY,

Estimated breakeven price for Sky Habitat according to experts is about $1,300 per square foot.

seefei said...

AK
You may want to look at kingwan, partner of HLS in the skywood project. With the ipo of its thailand subsidiary, its dividend will go up to 3cts per share. management of kingwan had promised that 50% of the profit from the thai subisdiary ipo will be distributed to shareholders over a five years period. that will bump up its dividend from 1.5cts to 3cts. at 31.5cts close ytd, it gives a 9.52% yield.

AK71 said...

Hi seefei,

We are fortunate to have Solace guest blogging about King Wan. He did a very good piece here:

http://singaporeanstocksinvestor.blogspot.sg/2013/11/tea-with-solace-king-wan-corp-ltd.html

King Wan looks like a mini conglomerate to me which isn't a bad thing, of course. Having a diversified income base is always a good idea.

However, just like when First REIT sold its Adam Road property and decided to distribute the gains gradually, I would discount such extraordinary dividends and try to value the stock based on what is a sustainable dividend payout.

Compared to Hock Lian Seng's more conservative 40% dividend payout ratio, King Wan's dividend payout ratio of about 75% is very high. Still sustainable, of course, but we might want to demand a higher dividend yield in such an instance as investors for income.

So, if I am after a sustainable 5% dividend yield, for example, I will turn buyer when King Wan's share price retraces to 30c a share. Coincidentally, the 200d MA is flat at 29.5c. :)

Solace said...

Hi Ak,

I pay attention to the M&E segment of king wan engineering arm to see if dividends is sustainable.

If the competitive edge of the of the engineering segment declines or narrow, it is sign for things to come.

So far so good, but have to pay attention. I know of people who brought kingwan because of the Thai IPO, but they have no underlying knowledge of the core business.

They still have contribution from ship chartering and mobile toilet rental. They are stable, but core engineering segment still the driving force of revenue.

AK71 said...

Hi Solace,

Thanks for weighing in on this. For sure, the bread and butter of the business must be strong. It is nice to have a bit of syrup and toppings but they are just the extra bits that make a meal tastier. ;)

So, I feel that although 30c a share is probably a fair price to pay for King Wan's stock for anyone thinking of investing for income, I would like to have a bigger margin of safety. :)

Solace said...

A very good point about safety margin. My purchase price is in the region of mid 20 cents. Certainly, i wont recommend people to chase it in the 30 cents ++ regions.

many analysts give a buy rating with target price at 40 cents. i think as usual, they are overly optimistic. :)

AK71 said...

Hi Solace,

"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results." Warren Buffett

;p

Bruce said...

hi AK,

how do you view HLS' high debt gearing rate? or is this a common characteristic in this business?

AK71 said...

Hi Bruce,

When there is debt in the company, I try to find out the reason why. Is the debt used for productive activity? In this case, the borrowings are to fund the 3 development projects mentioned.

Of the 3, 2 which are largely sold will obtain TOPs by end of the year or early next year. Then, we are left with The Skywood which is the bugbear. If this last project manages to at least break even, then, negative impact will be minimal. Otherwise, there will be downward pressure on EPS and NAV but it wouldn't cause the company any distress.

We have to remember that the development properties have a value of almost $300 million while long term bank loans only amounted to $128 million by end of 2013.

The balance sheet does not worry me. :)

betta man said...

Accumulated HLS at 0.265 after it goes XD today.

AK71 said...

Hi betta man,

That purchase price is at a slight discount to NAV. Sounds good. :)

boonchin.ng said...

Hi AK,

Just saw this great post today (hope am not too late).

Attracted by HLS good DY%, good balance sheet, and good future prospect with public infrastructure spending. Though not perfect for growth, but decent one for income. If you can only choose one between Yongnam and HLS today, your vote goes to? :P

AK71 said...

Hi boonchin,

Been combing my blog's archives? ;p

Hock Lian Seng's stock has hardly changed in price since it went XD. I think it is still 26.5c a share now.

At the current prices, I would choose Hock Lian Seng over Yongnam but if someone is worried about trading liquidity, then, he would be quite worried about Hock Lian Seng.

What we choose in the end will depend on our priorities. :)

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