Seasonally Slow Quarter

HSS achieved net profit of RM3.2m (-56% qoq) in 1Q17, accounting for 19% of our RM16.7m estimate in FY17. This is within our expectation as HSS experiences a slow start traditionally early in the year like the rest of the construction industry. Revenue declined 20% qoq to RM29.3m (4Q16: RM36.7m) due to slower progress for ongoing projects during the festive period. We maintain our BUY call on HSS with a TP of RM1.20 based on CY18E PER of 15x, giving a potential upside of 33%. Net cash of RM24.7m or RM0.08/share supports net yield of 1.9% in FY17E, reasonable for a growth company.

Slow Quarter Traditionally

There is no comparative 1Q16 figures as HSS just listed in August 2016. Hence, only qoq change is available. Revenue declined 20% qoq to RM29.3m (4Q16: RM36.7m) as we are comparing the strongest fourth quarter to the weakest first quarter traditionally. The decline is attributable to slow progress for ongoing projects due to the festive period. Meanwhile, EBIT saw a sharp contraction of 53% qoq to RM9.8m due to higher other operating expenses (+44 qoq). Net profit declined 56% qoq to RM3.2m due to high tax rate of 30.6% in 1Q17 as there were non-deductible expenses.

Within Our Expectation and No Changes in Earnings Forecasts

Net profit of RM3.2m in 1Q17 comprises 19% of our RM16.7m estimate in FY17E. This is within our expectation as 1Q is seasonally weak quarter. We maintain our earnings forecasts assuming HSS will secure additional contracts worth RM150m in 2017. We expect better performance in subsequent quarters, given its high outstanding order book of RM406m.

Maintain BUY With Unchanged TP of RM1.20

We maintain our BUY call and target price of RM1.20, giving potential upside of 33%. Our TP is based on CY18E PER of 15x, a discount of about 20% to the weighted average PER of 18.6x for global peers. Its net cash of RM24.7m or RM0.08/share supports our assumed dividend payout ratio of 30% in FY17E. Net yield of 1.9% is reasonable for a growing company.

Key Downside Risks to Our Call

i) Litigation actions from MAHB and MRCB, but they are insured by Professional Indemnity Insurance (PII) up to RM10m per annum, ii) earnings lag due to timing of contract wins; iii) execution risks involved in its expansion plans; iv) slowdown in construction contract awards.

Source: Affin Hwang Research - 24 May 2017