HSS’ net profit increased to RM2.7m in 4Q19 from RM0.9m in 3Q19 as revenue and PBT margin expanded. This was sufficient to reverse earlier losses and a net profit of RM1.1m was reported for 2019. HSS secured net new contracts of RM182m to increase its order book to RM582m. We expect the implementation of public-sector projects will be delayed due to the current political uncertainties. We cut our 2020-21E core EPS by 12-24% to reflect lower new contract wins. We downgraded our call to HOLD from Buy earlier this week. We reduce our TP to RM0.73, based on 2020E PER of 18x.

Below Expectations

HSS’ 2019 result was below market and our expectations. Net profit of RM1.1m was below full-year consensus forecast of RM2.8m and our estimate of RM3.7m. A sharp turnaround from net loss of RM102.8m in 2018, which was impacted by a one-off impairment of goodwill of RM119.4m. Revenue fell 22% yoy to RM148.5m in 2019 due to the delay in resumption of works on the East Coast Rail Link (ECRL) project and the reduction in contract value for the Klang Valley MRT Line 2 (MRT2) project by RM29m. As cost did not fall in line with revenue, HSS’ core net profit fell 94% yoy to RM1.3m in 2019 from RM20.5m in 2018.

Good Order Book Replenishment

HSS secured RM211m worth of new contracts in 2019. But this was partly offset by the RM29m reduction in the MRT2 contract due to the reduced scope of works. Its remaining order book increased by 7% to RM582m at end-2019 from RM546m at end-2018. We reduce our new contract win assumptions to RM150m/RM200m in 2020/21E from RM250m/RM300m previously as we expect the current political uncertainties will lead to delays in the implementation of public-sector projects. We introduce our 2022E core net profit of RM23.5m (+26% yoy) assuming new contract wins rise to RM250m.

Positive Long-term Prospects

We remain positive on its long-term prospects for HSS to win new contracts as the government accelerates development expenditure and revive major infrastructure projects. But we believe the current political uncertainties will dampen sentiment on the stock. We reiterate our HOLD call. We reduce our TP to RM0.73 (based on target PER of 18x) from RM0.78 following our earnings downgrade. Key upside risks are political uncertainties are cleared and government infrastructure spending accelerates.

Source: Affin Hwang Research - 26 Feb 2020