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%.
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.
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