We hosted HSS for a presentation to about 25 Malaysian institutional investors. HSS remains cautiously optimistic on prospects given its record-high order book of RM963m, equivalent to 6.6x 2017 revenue. All its projects are proceeding as per schedule but only preliminary works has started for the RM273m MRT3 project, pending the appointment of the main contractor. We maintain our BUY call with TP of RM1.44, based on target FY19E PER of 20x.

Tender Book of Over RM500m

HSS has a current tender book of over RM500m and has exceeded its new contract target this year by securing RM316m worth of contracts YTD. As the largest local engineering consultant for highway, railway and water infrastructure projects, We believe HSS remains competitive to bid for new projects under the new regime and it has worked on projects initiated by Pakatan Harapan leaders in the past.

Ongoing Works for ECRL Progressing Well

Works on the East Coast Rail Link (ECRL) is proceeding at a fast pace and has reached a 14% completion rate for Phase 1 worth RM46bn. Its detailed design contract of RM25m is nearly complete while its construction management contract worth RM82.5m has started.

Potential Projects in the Pipeline

Some of the potential projects in the pipeline include the Pan Borneo Highway Sabah, Kuching LRT, Penang LRT and 3 paired roads, KL-Singapore High Speed Rail (HSR), Penang island water supply and coal transportation projects for Adaro in Indonesia. HSS has been involved in preliminary works for these projects.

Top Small-cap Construction Sector BUY

We believe the sharp correction in the share price is an opportunity to BUY the stock given the good structural growth story for the company. FY18E PER of 16x is attractive given 3-year EPS CAGR of 23% in FY18-20E. HSS remains our top sector small-cap BUY.

Source: Affin Hwang Research - 17 May 2018