We believe that HSS Engineers, an engineering consultancy, is an early beneficiary of the acceleration in infrastructure spending and revival of large-scale projects by the Malaysian government. Its order book increased to about RM587m as at end-2019 after it clinched the Johor BRT contract. With more infrastructure projects in the pipeline, we believe prospects for HSS to grow its order book will improve in 2020. We expect the 4Q19 earnings to reverse the 9M19 loss. We reiterate our BUY call with a target price of RM1.18, based on a 2020E PER of 26x.

Growing Order Book

HSS expanded its order book to about RM587m as at end-2019 from RM546m as at end-Sep 2019. It secured new contracts worth RM210m in 2019, but the reduction in scope of works for the Klang Valley MRT Line 2 (MRT2) project reduced the net new contract wins to RM181m. Some of the key new contracts secured are for the Northern Corridor Economic Region (NCER), Pan Borneo Highway (PBH) Sabah, East Coast Rail Link (ECRL) and Johor Bus Rapid Transit (BRT). We understand that additional works could be awarded to HSS for these projects going forward.

Potential New Contracts

HSS is bidding for over RM300m worth of new contracts with good prospects to further expand its order book in 2020, including the water-related infrastructure projects, and Bayan Lepas Light Rail Transit (LRT). The potential revival of the MRT3 and Kuala Lumpur-Singapore High Speed Rail (HSR) projects will also provide opportunities for HSS to win contracts as it had been involved in preliminary works for the projects. We maintain our new contract win assumption of RM250m for 2020.

Pursuing Recurring-income Projects

HSS and its partners lost the tender for the Large Scale Solar Phase 3 (LSS3) project as competition was stiff. However, it continues to explore projects that generate long-term recurring income that involve equity investments and operational and maintenance contracts.

News Flow Likely to Drive Positive Re-rating

We believe that potential news flow of new contract awards will drive the positive re-rating of HSS’ share price. We reaffirm our BUY call with a 12- month target price of RM1.18, based on a target 2020E PER of 26x, which is below its 5-year mean of 33x. Key downside risks are delays in winning new contracts and execution risks.

Source: Affin Hwang Research - 30 Jan 2020