Source: BCA Media Release Jan 2021
Source: BCA Media Release Jan 2015
With this backdrop, we started to look into the construction companies in Singapore that could ride this recovery of the sector and provide meaningful returns in the midterm (1-3 years). Some names came into mind such as Lian Beng, which recently got a privatisation offer from the founding family at $0.5.
It is more of a formality (Low probability of being accepted given it is trading at Price to Book of 0.35) as they have increased their stake in the firm.Â
The other names would be Koh Brothers and OKP. Given the uncertainty of the recovery, we would prefer a safer company (No debt) with a good track record and is known to be a generous dividend payer in good times.
Hock Lian Seng
This brings us to shortlist Hock Lian Seng which was established in 1969. Hock Lian Seng is currently lingering near the recent lower range of their share price movements despite seeing an improvement in earnings. Here is a good summary by Morningstar of what Hock Lian Seng’s business is involved in.
Hock Lian Seng Holdings Ltd is a Singapore-based civil engineering group. It is engaged in undertaking a wide range of civil engineering projects for both the public and private sectors in Singapore. The firm’s customers include government and government-related bodies of Singapore, such as the land transport authority, housing development board, PSA Singapore terminals, public utility board, and civil aviation authority. It is also engaged in property development and property investment businesses. The operating segments of the group are Civil engineering, Property development, and Properties investment, of which the majority of its revenue comes from the Civil engineering segment. The group services all of its revenue from Singapore.
Source: Morningstar Business Description
Financial Metrics
We start our analysis by looking at some of their numbers:
| Financial Metrics | |
| Symbol | HLSG |
| Price | 0.23 |
| Price-Earnings | 11 |
| Price to Book | 0.56 |
| Debt to Equity | Nil |
| Cash and Investment Securities | 0.16 per share |
| Market Cap | 117 million |
| Dividend Yield | 1.1% |
Looking at the numbers, it is something that excites a value investor as their balance sheet is strong, and it is trading at a reasonable valuation. Taking away the cash and investment securities, we are looking at a profitable business that could be riding on an improvement in their sector at only 7 cents (0.23-0.16) or PE of around 3.33. The dividend yield is kind of disappointing but 2020 was a bad year after all.
Source: Hock Lian Seng June 2021 Financial Statements
From their latest half-yearly results, we are seeing a marked improvement in revenue and earnings that are growing in tandem. It points to the recovery thesis to be on track. The Group’s order book for ongoing projects of the civil engineering segment was approximately $308 million for the Maxwell station and the Changi Airport joint venture project as of June 2021.
Source: HLS 2020 Annual Report
From the figures extracted from the annual report, this is not a growth stock with consistent increment in revenue and profits but is reflective of the cyclical business in which the construction sector is.
It is heartening to know that despite the huge drop in revenue for 2020, the company was still able to maintain profitability. This shows the acumen and strength of the management. Not forgetting the ability to tender wisely for projects given the rising construction cost from labour and raw materials.
Source: HLS 2020 Annual Report
One of the merits of this investment would be the management have been a believer in rewarding shareholders through generous dividends, as we could see from their track record through the years. We could be looking at a dividend of above 5% based on their distribution history if things go back to normalcy.
Chartist Point of View
Source: Investing.com
Hock Lian Seng was listed in 2011 and the current share price is near the lowest it ever went to. The price action seems to be bottoming out which gives us a potential choice entry-level.
For potential targets, the 0.27-0.3 region will be the first resistance and target level. If things pan out well, 0.38-0.4 would be viable and supported by the fundamentals- their current PE of 3.33 based on ex-cash and investment securities is attractive.
A possible stop level could be placed below 0.2 if it is a purely trading play.
Summary
The following pointers sum up our thoughts on Hock Lian Seng as a proxy to ride the recovery of Singapore’s construction sector.
- The construction sector is picking up from the Covid 19 effect and we have seen an increase in total contracts value from 2020 to 2021. Forecasted contract values to 2025 are expected to move up further from the current status.
- Valuation seems attractive for Hock Lian Seng and there was a marked improvement in their revenue and earnings based on their half-yearly results.
- A big portion of the current market cap is backed by cash and investment securities- give us a good margin of safety.
- It has a good track record of being a good dividend yield stock and has been profitable every year since listing.
- Charting Perspective looks decent as it is coming up from the lower end of the price range since listing.
Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
