HSS reported a headline net loss of RM102.6m in 2018, mainly due to a one-off RM119.4m impairment of goodwill on its acquisition of SMHB. Core net profit of RM20.9m in 2018 was also 12% below our forecast of RM23.7m, mainly due to higher-than-expected operating costs. The share price could see a correction in the short term due to the weak result. But, long-term prospects remain good given potential new contract wins and high remaining order book of RM546m. We cut our EPS forecasts by 2-3% in 2019-20E. Maintain our BUY call with a lower RM1.16 target price, based on 2019E PER of 22x.

Below Expectations

HSS reported 2018 revenue of RM189.7m, a 30% yoy growth mainly driven by higher contribution from its engineering services division (+69% yoy). This was partially offset by lower project management (-14% yoy) and BIM services (-59% yoy) revenue. However, it recorded a net loss of RM102.6m in 2018, mainly due to impairment loss on goodwill of RM119.4m. Although the result is a negative surprise, the impairment is just an accounting adjustment and does not affect operating cash flow.

Higher Core Net Profit

Excluding one-off items, core net profit jumped 31% yoy to RM20.9m in 2018, on the back of higher revenue and improved EBIT margin of 17.5% compared to 15.6% in 2017. But HSS incurred a headline loss for 2018 due to amortisation of intangibles of RM4.4m and impairment of goodwill amounting to RM119.4m. HSS incurred a core net loss of RM0.1m in 4Q18 mainly due to the 13% qoq drop in revenue (lower progress billings) and a 5% qoq increase in cost of sales.

Earnings Supported by High Order Book

HSS’ order book stood at RM546m as at December 2018, providing earnings visibility over the next 2-3 years. Ongoing projects such as the Maju Expressway Extension to KLIA and West Coast Expressway will continue to contribute to group earnings. Good prospects to replenish its order book going forward with its tender submission for water project, given SMHB’s strong expertise and track record in the water industry. In 2018, SMHB contributed RM60.2m in revenue and RM10.9m in net profit. We reduce our TP to RM1.16 from RM1.20 to reflect the cut in our EPS forecasts. Maintain BUY.

Source: Affin Hwang Research - 22 Feb 2019