HSS reported weak 1Q19 results that were below expectations. The company posted a core net profit of RM0.4m in 1Q19, turning around from a core net loss of RM0.1m in 4Q18. The earnings outlook remains challenging in the medium term, but order book expansion prospects have improved with its order book rising to RM558m after securing RM51m of new contracts in 1Q19. We cut our core EPS by 12-25% in 2019-21E to reflect lower PBT margins, but we reiterate our BUY call with a higher 12-month TP of RM1.25, based on a 2020E PER of 24x.

Below Expectations

HSS’ core net profit of RM0.4m in 1Q19 comprised only 1% of consensus and our previous 2019E forecasts of RM26-29m. Revenue grew 7% yoy to RM36.5m in 1Q19 with the contribution from SMHB (acquisition was completed at end-1Q18). However, net profit was lower at RM0.3m in 1Q19 compared to RM0.9m in 1Q18 due to higher operating costs, interest expense and amortisation arising from the acquisition of SMHB. Revenue fell 22% qoq in 1Q19 due to seasonal factors (slow work progress due to festive holidays). HSS reported net profit of RM0.3m in 1Q19 compared to a net loss of RM119.5m in 4Q18, which was mainly due to impairment of goodwill from the acquisition of SMHB.

Expanding Order Book

HSS secured RM51m of new contracts in 1Q19, which were mainly for waterrelated infrastructure. Its order book increased to RM558m at end-1Q19 from RM546m at end-4Q18. With the revival of the East Coast Rail Link (ECRL) project, HSS has resumed services for detailed design services with earnings contributions to start in 3Q19. The remaining RM97m contract value for the ECRL could increase on completion of the ongoing negotiations with the main contractor due to re-design works required following the change in the railway alignment. HSS also announced that it has secured a RM3.7m sub-consultant contract for the Air Telibong II water treatment plant.

Positive Long-term Prospects

The share price could see short-term weakness due to the disappointing results. But we believe any share-price correction is an opportunity to accumulate the stock. HSS is a potential beneficiary of increased government spending on water-related infrastructure and the revival of large-scale railway projects. As a result, we apply a higher PER of 24x (previously 22x) as we roll forward our valuation base year to 2020E, increasing our TP to RM1.25 from RM1.16 previously. Maintain BUY.

Source: Affin Hwang Research - 16 May 2019