• 3Q23 results in line, with GPM sustained; we expect a stronger 4Q23F.

• Near-term project wins from Pan Borneo Sabah Phase 1B, Bayan Lepas LRT, flood mitigation and Westports.

• Reiterate Add, TP of RM1.21.

3Q23 Results in Line

• HSS Engineers (HSS) today (16 Nov) declared 3Q23 core net profit of RM5.4m (-17% qoq, +6% yoy) bringing 9M23 core net profit to RM16.3m (+43% yoy), at 62% of our full-year forecast. This is in line with our expectations as we expect a stronger 4Q23F. Revenue in 9M23 rose 24% yoy to RM142m.

• The key highlight of HSS’s 3Q23 results was the 58% yoy increase in its project management consultancy (PMC) revenue to RM21m. This was driven by its MRT 3 and Pan Borneo Phase 1A projects, which helped to compensate for the 5% yoy decline in construction supervision revenue to RM14.5m. The decline in construction supervision was due to the completion of the Sungai Besi-Ulu Kelang Elevated Expressway in 3Q23 but offset by higher contribution from its East Coast Rail Line project due to the ongoing progress of the project, which is proceeding on track.

• 3Q23 GPM of 34% was in line with its past six quarters’ 31-37% level (vs. 22-29% in 1Q20-4Q21). Management appears confident it can sustain GP margins at these level.

Awaiting Key Contract Awards

• In regards to projects announced in the government’s Budget 2024, HSS appears 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 soon, according to the Budget announcement. For these, HSS said it has submitted engineering design bids for three smaller projects (RM500m each).

• The award of Pan Borneo Sabah Phase 1B packages will commence from Nov 2023 according to the Budget 2024 announcement. HSS was awarded a RM145m PMC role for Pan Borneo Sabah Phase 1A (15 packages) in Apr 2021. As Phase 1B will comprise 19 packages worth RM15.7bn, we estimate the PMC role to be worth RM300m, and we believe HSS has a high chance of being awarded for the PMC role Phase 1B because of its track record for Phase 1A.

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

• As at 30 Sep 2023, HSS has an orderbook of RM1.5bn and tenderbook of RM442m.

Reiterate Add and TP of RM1.21

• We reiterate Add call on HSS for its capex light model and market-leading position in the front-end of the construction value chain, 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 its mean post-Covid-19. Downside risks are slower rollout of projects and single project risk from MRT 3 PMC. Re-rating catalysts: stronger and faster awards.

Source: CGS-CIMB Research - 16 Nov 2023