HSS’ 18% share price correction over the past one month could be due to concerns over its upcoming 2Q19 results announcement on 15 August, as some government contracts expected to be awarded in 3Q19 have been delayed to 4Q19. Nevertheless, we remain positive on HSS’ prospects of winning new contracts as more infrastructure projects are rolled out. We reiterate our BUY call and RM1.30 target price, based on a FY20E PER of 26x.

Weak 2Q19 Results Expected

HSS’ 2Q19 results, to be announced after market hours on 15 August, could disappoint. Although the East Coast Rail Link (ECRL) was revived in April, HSS’ consultancy contract for remaining works of about RM97m for the ECRL project was only reinstated on 11 July 2019 with additional design works worth RM5m. Earnings contribution from this project will only start to be recognised in 3Q19 and ramped up in 4Q19. Furthermore, its independent consultant engineer contract for the Klang Valley MRT Line 2 was reduced to RM158.7m on 10 May 2019 from the previously announced RM188.3m.

New Contract Awards Delayed

We gather that HSS is bidding or negotiating for engineering contracts for the Johor Bus Rapid Transit (BRT), Non-Revenue Water (NRW) reduction plans and new water-related infrastructure for several states, Penang Light Rail Transit (LRT), and Pan Borneo Highway (PBH) Sabah. But contract awards for the Johor Bus Rapid Transit (BRT) and water-related infrastructure projects have been delayed to 4Q19 as the government is still evaluating tenders, including HSS’.

Further Goodwill Amortisation

There is further amortisation of the goodwill for the acquisition of SMHB Engineering amounting to about RM3m to be recognised in 2Q19 and 2H19. With the slow progress billings on its remaining order book of RM558m and amortisation of goodwill, it could incur a small loss or show a small profit in 2Q19. We will provide an update after the result release on 15 August.

Opportunity to Accumulate the Stock

We believe the share price correction offers an opportunity to accumulate given HSS’ good prospects of expanding its order book. We maintain our BUY call and 12-month target price of RM1.30, based on a FY20E PER of 26x. Key risks include lower-than-expected new contract procurement and profit margin squeeze due to rising competition.

Source: Affin Hwang Research - 9 Aug 2019