HSS Engineers has been appointed as the Independent Consulting Engineer (ICE) for the Klang Valley MRT Line 3 (MRT3) project with a contract value of RM289.9m (including GST). Total new contracts of RM300m clinched YTD have exceeded our earlier assumption of RM250m in FY18E. Prospects to grow its current order book of RM963m remain good. We raise our fully-diluted EPS by 8-11% in FY18- 20E assuming HSS will win another RM250m in new contracts in addition to the MRT3 contract in FY18E. Based on the same target FY18E PER of 20x, we raise our TP to RM1.84 from RM1.70. HSS remains our top small-cap construction sector BUY.

Largest Contract Ever

The MRT3 ICE contract is the single largest contract secured by HSS to date at RM273.5m (excluding GST). Adding the RM25m detailed design contract for the East Coast Rail Link (ECRL) clinched in January 2018, total new contracts secured YTD are RM300m. HSS was also appointed the ICE for MRT1 (RM110m share of contract) and MRT2 (RM205m contract value) previously and securing the contracts for all 3 MRT lines is a testament to its engineering consulting capabilities in undertaking railway projects.

Good Prospects to Grow Order Book

Prospects to grow its current record-high order book of RM963m (equivalent to 6.6x FY17 revenue) remain good. Some of the potential projects that HSS is negotiating/bidding for include the Pan Borneo Highway Sabah, KLSingapore High Speed Rail (HSR), Kuching LRT, Labuan-Menumbok Bridge Link (received letter of invitation to provide consultancy services for a contract value of up to RM14.3m this year) and some water-related projects (pursued by its new subsidiary SMHB Engineering).

Raising Earnings Forecasts

We raise our fully-diluted EPS forecasts by 8-11% for FY18-20E to reflect a higher new contract assumption of RM523m in FY18E (from RM250m previously) while maintaining our RM300m assumption for FY19E. Applying the same target FY18E PER of 20x (based on global engineering consulting peer average), we raise our target price to RM1.84 from RM1.70 previously.

Top Small-cap Construction Sector BUY

We like HSS given its strong position to win upcoming large-scale railway and highway engineering consulting contracts. The SMHB Engineering acquisition completed at end-March for RM270m places HSS in a strong position to win water sector projects, which is the next wave of infrastructure spending in Malaysia. HSS is our top small-cap construction sector BUY.

Source: Affin Hwang Research - 12 Apr 2018