HSS’ earnings increased nearly 6-fold yoy to RM2.3m from a low base, but were down 15% qoq due to the impact of the Movement Control Order (MCO) and festive holidays. Although the results were within our expectation, the MCO impact will be felt more severely in 2Q20, prompting us to cut our core EPS forecast by 29% in 2020 but lift our estimates by 32-45% in 2021-22E to reflect higher progress billings to catch up on work schedules. We lift our target price (TP) to RM0.58, based on 2021E PER of 24x. Maintain our HOLD call on HSS.

Within Our Expectation

HSS’ 1Q20 result was within our expectation but a surprise to the market. HSS reported net profit of RM2.3m, comprising 27% of our previous full-year forecast of RM8.6m and 17% of the consensus estimate of RM13.5m, as the MCO delayed the progress of some projects. HSS was able to adapt its business process to allow staff to work from home on some jobs and bill its clients during the MCO. HSS was able to carry out engineering design works on the East Coast Rail Link (ECRL) and Iskandar Bus Rapid Transit (BRT).

Sustained Recovery

HSS saw a sustained recovery in revenue up 4% qoq and 15% yoy to RM42m in 1Q20. PBT jumped 2-fold to RM3.7m in 1Q20 with PBT margin improving to 8.7% in 1Q20 compared to 3.3% in 1Q19. Lower effective tax rate bumped up net profit by 6-fold to RM2.3m.

Reasonable Order Book Replenishment

HSS secured RM30m worth of new contracts YTD 2020, including detailed design for ECRL Section A and construction supervision for Central Spine Road Section 5A. Its remaining order book decreased by 3% qoq to RM561m at end-1Q20 from RM582m at end-2019 on slow order book replenishment. Prospects are good for HSS to win contracts if the government decides to revive the KL-Singapore High Speed Rail (HSR) and Klang Valley MRT Line 3 (MRT3) projects.

Positive Long-term Prospects

We roll forward our valuation base year and expect earnings to rebound in 2021. Based on a higher target 2021E PER of 24x (2020E PER of 18x previously), we upgrade our TP to RM0.58 from RM0.32. HSS’ share price has rallied due to speculation on the revival of mega infrastructure projects but we remain cautious. Maintain HOLD. Upside risk: acceleration in government infrastructure spending; downside risk: political uncertainties.

Source: Affin Hwang Research - 22 May 2020