Ahead of 2Q19 results next week, HSSEB’s prices slid 21.8% from one month high of RM1.19 to RM0.93 yesterday, tracking external markets headwinds and concerns over slower progress billings due to project delays. We like HSSEB’s exposure to a wide array of domestic infrastructure segments, riding on the potential mega projects revival in Malaysia and the ASEAN as major energising force for growth that are impervious to burgeoning trade war tensions. We believe HSSEB will be the first to benefit given requirements to appoint engineering consultants to design and conduct feasibility studies on infrastructure projects before they are implemented. Valuation is not expensive at 18.4x FY20 P/E (31% below its 2Y average 27x P/E), supported by RM558m order book (sustainable for minimum 2 years). Technically, the stock is ripe for an oversold rebound towards RM0.98-1.12 after a brief sideways consolidation.

Malaysia’s engineering DNA. HSSEB is the 1st engineering consultancy services listed on Bursa Malaysia and the largest local engineering firm that provides engineering and project management services to a wide array of sectors including urban infrastructure, roads and highways, railways and metro systems, building and structures, transportation planning, power generation, and water resources management and supply. Its clientele is spanning from the domestic and international arenas (India, the Middle East and ASEAN). The Group has been involved in many notable large-scale projects including MRT 1 & 2, Maju Expressway 2, West Coast Expressway, SUKE Expressway, Pahang – Selangor Water Raw Transfer, Development of Sungai Selangor Phase 1, 2 and 3, Sarawak Water Grid Study and East Coast Rail Link.

Tapping the huge infra boom in Asia as overseas contracts only contributed 0.6% to FY18 revenue. HSSEB’s current order book of RM558m will accord earnings visibility over the next 2 years. Moreover, it is aggressively making inroads into the huge infrastructure potential in Asia. According to the Asia Development Bank report in Feb 2017, a total of USD1.7trillion infrastructure spending (defined as transport, power, telecommunications, water supply, and sanitation) is needed in Asia each year through 2030 to maintain its growth momentum, tackle poverty, and respond to climate change, apart from the increased population and urbanization, accelerated mobility and demand for transportation coupled with increased trade competitiveness. The gap is acute in ASEAN, where infrastructure investment stood at just ~USD55bn, far short of the USD147bn benchmark.

Strong order book of RM558m to sustain 2 years growth. From the slump in mega projects post-GE14, there appear to be signs of pump-priming making a gradual comeback, with more positive news flow on new tenders’ outlook towards end 2019 after the tabling of Budget 2020 on 11 Oct. As the leading engineering consulting firm for railway and road projects in Malaysia, HSSEB is looking to participate in the upcoming tenders including the following: (1) Iskandar Malaysia Bus Rapid Transit (BRT), (2) MRT3, (3) Penang LRT, (4) Central Spine road, (5) Kuching LRT, (6) Bandar Malaysia, (7) ECRL, (8) Penang Transport Masterplan etc.

Ripe for a relief rebound after sliding 28% from YTD high of RM1.29. Although near term outlook remain challenging after multiple key SMAs supports breakdown, HSSEB’s technical readings are steeply oversold following a 28% slide from YTD high of RM1.29 (2 Apr) to RM0.93 yesterday. The stock could trend sideways in the near term to build a base with key supports at RM0.91 (23.6% FR) and RM0.90 psychological support before staging a long overdue technical rebound. A decisive breakout above RM0.98 (38.2% FR) will spur prices higher towards RM1.03 (200D SMA) before reaching our LT objective at RM1.12 (100D SMA). Cut loss at RM0.87.

Source: Hong Leong Investment Bank Research - 7 Aug 2019