• We came away from a group meeting with management on 19 Oct feeling more positive as project visibility improves and awards are on the horizon.

• From Budget 2024, flood mitigation, Penang LRT and Pan Borneo Sabah Phase 1B are likely wins, HSS believes.

• In the private sector, a Westport win is imminent. Reiterate Add and DCFderived TP of RM1.21.

Key Highlights From Meeting With HSS Management

• In terms of Budget 2024 projects, HSS appears more confident it will have a role in the flood mitigation projects, Penang LRT and Pan Borneo Sabah Phase 1B. A total of 33 high priority flood mitigation projects costing RM11.8bn will be rolled out. The letter of acceptance for 24 projects worth RM5.1bn will be issued by Oct 23 and remaining by 1Q24, according to the Budget. For this, HSS has submitted engineering design bids for 3 smaller projects (RM500m).

• For Pan Borneo Sabah Phase 1B, awards will commence from November 2023 onwards. HSS was awarded a RM145m Project Management Consultancy (PMC) role for Pan Borneo Sabah Phase 1A (15 packages) in April 21. As Phase 1B will comprise 19 packages worth RM15.7bn, we estimate the PMC role to be worth RM300m.

• For private sector jobs, the more imminent project will be the lead consultant role for Westports Phase 2; Westports is waiting to sign the concession agreement with the government.

• For its current PMC role for MRT 3, it is doing optioneering and land acquisition work now and expects a strong pick-up in revenue recognition once the three large civil packages are awarded. For the Bayan Lepas Penang LRT, it recently submitted the reference design tender with a French JV partner and expects an award by Dec 23.

• HSS appears confident it can keep GP margins at the level of the past 6 quarters of 31- 37% (vs. 22-29% for 1Q20 to 4Q21). Please see Fig 4. Since 2014, HSS’s orderbook has registered a 45% CAGR to a peak of RM1.4bn. What are the longer term low-hanging fruits?

• As mentioned in our report “More visible contract flows in FY24F”, the key to a longer term sustainable re-rating is i) recurring income from its maiden win for a 30MW solar photovoltaic plant in Kedah from the Corporate Green Power Programme (CGPP), and ii) extending its revenue base to include more overseas projects. HSS’s lean balance sheet with a net gearing of 0.07x will also enable it to be more aggressive in its expansion plans, in our view.

• HSS is also positive on the Sarawak infrastructure market with the setting up of HSS Alliance (Sarawak) Sdn Bhd. It is currently working on smaller projects there with local Sarawak consultants but potential larger projects are Bintulu Bitumen Plant, Sarawak Rural Road Connectivity and Trans-Borneo Railway, Sarawak.

• Currently, overseas revenue contributes less than 2% of HSS’s group revenue. It is currently working on a railway project in Bangladesh, providing consultancy and technical services, and as PMC for Jakarta’s LRT project. In the more immediate term, it is targeting more projects in Saudi Arabia, Bangladesh and Cambodia and aims for overseas projects to contribute 50% of revenue in the next five years.

Reiterate Add and TP of RM1.21

• We reiterate Add on HSS with a DCF-derived TP of RM1.21 (WACC: 9.4%, TG: 4.5%). At our TP, HSS will trade at 16.6x FY24F P/E, which is still below mean post-Covid-19. Downside risks are slower rollout of projects and single project risk from MRT 3 PMC.

• We maintain our view that, while officially its tenderbook is at RM415m (historically 50% success rate), there is a potential RM1.9bn worth of engineering and project management services (EPMS) projects in the pipeline locally over the next two years (Fig 1).

Source: CGS-CIMB Research - 20 Oct 2023