HSS could secure more contracts like ECRL, Pan Borneo and HSR with its tender book of RM250-300m. We tweaked our FY17E earnings to reflect better timing in securing new contracts and progress billing on its existing order book of RM358m. We upgrade our TP for HSS to RM1.34, giving potential upside of 20% (based on 2018E PER of 17x). Share price has reacted positively to the Securities Commission and Bursa Malaysia’s recent approval of HSS’ listing transfer to Main Board. HSS remains our top small-cap top BUY among construction stocks.

High Chances of Securing More Contracts

HSS has good prospects to secure more new contracts like East Coast Rail Link (ECRL), Kuala Lumpur-Singapore High Speed Rail (HSR) and Pan Borneo Highway (PBH) Sabah with tender book worth RM250-300m. Conventionally, it is likely to secure detailed design contracts with higher value subsequent to the preliminary design contracts clinched. HSS won total preliminary design contracts worth RM22.6m for ECRL. It was the only local consultant appointed for this project out of 4 consultants. The other 3 were consultants from China. Typically, preliminary design accounts for 20-25% of total project value that HSS could potentially win.

Tweaked Our Earnings

We tweaked our FY17E earnings to reflect better timing in securing new contracts and progress billing on its existing order book of RM358m as at 31 Aug 2017. Thus, we reduce FY17E EPS by 17% to 4.7sen, while still maintaining our new contract assumptions of RM150-200m per annum in FY17-19E. So far, HSS has secured RM82.2m worth of new contract year-todate, comprising 55% of our new contract assumption of RM150m in FY17E. Some major contracts secured are HSR (RM17.6m), Tun Razak Exchange (RM19m), ECRL (RM22.6m) and Bukit Bintang City Centre (RM6.3m) projects. Management is still exploring potential M&A in water consulting business, which could boost earnings and generate recurring income from operation and maintenance services.

Upgraded TP to RM1.34

We upgrade our TP for HSS to RM1.34, giving a potential upside of 20%. This is based on target 2018E PER of 17x and PER-to-growth of 0.6. This is justified given its; i) high chances of securing more contracts as a Bumiputerastatus company; ii) healthy order book replenishment; iii) high PAT margin business model of 10%; iv) high core ROE of 18-26% for FY17-19E; and v) 3-year EPS CAGR of 26% in FY17-19E. Maintain BUY.

Key Downside Risks to Our Call

Earnings lag due to the timing of contract wins; ii) execution risks involved in its expansion plans; iii) a slowdown in construction contract awards.

Source: Affin Hwang Research - 28 Aug 2017