Hock Lian Seng

For some background, Hock Lian Seng is in the construction industry and provides civil engineering services for both public and private projects (mostly in Singapore). Some of its projects include the construction of Marina Bay station and associated tunnels for the Downtown Line as well as the design and construction of the Marina Wharf section of the MCE. While I know some people that think construction is not a good industry to be in right now (with the falling office rentals and residential housing prices), but I think that this company shows some potential is being a good investment.

As usual, starting off with the income statement. In 2015, the company earned 7.2 cents per share attributable to equity holders of the company. This was a huge decline from 2014, when the company earned 14.2 cents per share attributable to equity holders of the company, but this difference was mainly due to the smaller size of the projects recognized in 2015 than in 2014 (Ark@KB, completed in 2015 is a smaller project than the Ark@Gambas, completed in 2014). Since 2010, the company has earned more than 4.7 cents per shares, which is quite good considering that the current price of the share is 39.5 cents, giving it a P/E ratio of below 8.5 even on its weakest year in the last 6 years (which was in 2013).

The balance sheet is another strong point of the company for me. With $157 million in cash and only $15.5 million in debt, the company has a net cash position of around $142 million. This is quite substantial considering that the company has a market cap of around $200 million. That aside, the company also has some investment securities, worth around $33 million. There are some flip sides though, the company has development properties that may or may not be affected by the fall in residential property prices and office rentals as well as $60 million due from a joint venture that I'm not really sure about either. But with almost 70% of the share price being in cash that can be used for the company to expand or maybe even used to pay higher dividends, as well as quite low debt, I think that the company's balance sheet is favorable.

The cash flow statement is pretty neutral, with little net change in its working capital last year and a decrease in working capital with a larger decrease in development properties last year (which may be due to the projects mentioned above). The company was able to generate cash for 2014 and 2015 through its operating activities and after its investing activities, which is quite good, but it may be better if the company uses its large amount of excess cash to take on more projects (which puts more money into working capital) or make more investments, so that the money won't just be sitting in the bank earning a paltry interest rate.

The prospects of the company seem quite good as well, especially for infrastructure projects. With construction demand in Singapore set to change from the current $27.2 billion to an estimated $27-34 billion, this is likely to be a boon for construction companies. Public sector demand also is expected to make up two-thirds of this demand as opposed to slightly above half last year, which is especially good for the company considering that it takes on public sector projects such as MRT stations and depots. However, the company does not seem to have any projects lined up in the next two years until 2018, which may affect its profits in the short- to medium-term, so these 2 factors may counterbalance each other. But with the company's strong balance sheet, it may be able to take on more public sector projects and be able to grow its profits along with the increase in public sector construction demand.

But even if the company does not grow, it is currently earning quite a good profit on its share price. While the share price may not have dropped as much as the overall market from its peak, this may actually be due to it already being quite good value for money. Along with all the points mentioned above, the company has also paid quite a good dividend to its shareholders, with more than 1.625 cents per share since 2010, giving a dividend yield of above 4% at its current price (it even paid a 4 cent dividend after the bumper 2014 year!).

I think this company is quite a good company. Have I invested in it yet? Nope, but I am thinking of investing in some of its shares due to the positive points mentioned above. (It is also proposing a 2.5 cent dividend this year).

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