HSS Engineers is currently bidding for railway, renewable energy and water-related projects to expand its order book. The government’s ongoing water asset consolidation exercise and planned water tariff hikes nationwide will support crucial capital expenditure to expand the water supply and improve distribution efficiency. The potential revival of highway and railway projects will also improve HSS’ new contract procurement prospects. HSS remains our top small-cap sector BUY with a new target price of RM1.20, based on a FY19E PER of 22x.

Bidding for Water Projects

State-owned water utility Pengurusan Air Selangor Sdn Bhd has a capex plan of RM30bn over 30 years starting from this year. Other state governments also plan to increase their capex to improve their water supply and distribution systems. We gather that HSS has submitted 10-12 bids for water infrastructure design contracts nationwide. Some tenders are submitted in partnership with contractors for design and build projects.

High Order Book Even With ECRL Cancellation

HSS’ order book stood at RM588.6m as at 30 Sept 2018, providing earnings visibility for the next 2-3 years. It has good prospects of winning new contracts this year with potential tenders worth more than RM300m. HSS’ suspended contracts for the East Coast Rail Link (ECRL) project (remaining value of RM95m or 16% of its order book) will likely be cancelled with the project termination; we excluded them from our forecasts earlier.

Looking to Participate in Upcoming Project Tenders

As the leading engineering consulting firm for railway and road projects in Malaysia, HSS is looking to participate in upcoming tenders including the following: (1) Iskandar Malaysia Bus Rapid Transit (BRT); (2) Klang Valley Double Tracking (re-tender); (3) Penang LRT; (4) DUKE Phase 2A expressway; (5) Kuching LRT; (6) Three paired roads project in Penang; and (7) a Philippine highway. It also plans to expand into renewable energy (RE) generation projects under the third cycle of the large-scale solar (LSS3) scheme with some partners.

Sector Top Small-cap BUY

We believe HSS is a potential beneficiary of the upcoming infrastructure projects. We lift our core FY19-20 EPS forecasts by 2-6% to reflect higher new contract assumptions of RM200-250m p.a. Based on an unchanged FY19E PER of 22x, we lift our TP to RM1.20 from RM1.18. Maintain BUY.

Source: Affin Hwang Research - 28 Jan 2019