Within Expectations

• HSS’ 9M20 results were within our expectations but above the market’s, turning around from a net loss of RM1.6m in 9M19 to a net profit of RM7.7m in 9M20.
• Net profit grew 5% qoq to RM2.8m in 3Q as construction activities picked up after the easing of the Movement Control Order (MCO). We see good prospects to grow its order book with increased infrastructure spending in Budget 2021.
• HSS remains one of our top BUYs with a RM0.82 target price (TP), based on 2021E PER of 26x. Key risk is political uncertainties delaying project roll-outs.

Sustained Recovery

HSS’ net profit of RM7.7m in 9M20 comprises 83% of the consensus full-year forecast of RM9.3m and 74% of our RM10.2m estimate. We believe earnings are on track to achieve our forecast with a potential upside surprise since 4Q is usually its strongest quarter. However, we maintain our earnings forecasts given the risk of the current Conditional MCO delaying progress billings on ongoing projects and new contract awards. EBIT margin improved to 11.9% in 9M20, compared to 3.6% in 9M19 on the back of higher revenue (+16% yoy) and implementing cost control measures.

Good Prospects to Expand Its Order Book

We estimate that HSS secured net new contracts of RM31m in 9M20 and we remain optimistic that the company will achieve our assumption of RM50m in 2020. The slower replenishment led to its remaining order book declining 7% yoy to RM488m. But we see good prospects for HSS to expand its order book as it has submitted tenders worth RM280m. Key mega projects worth about RM143bn are expected to be rolled out in 2021. Some of the potential new projects are the Johor Bahru-Singapore Rapid Transit System (RTS), Pan Borneo Highway (Sabah), Klang Valley MRT Line 3 (MRT3), KL-Singapore High Speed Rail (HSR) and Penang Transport Master Plan (PTMP).

Remains a Top Sector BUY

We believe HSS is a potential beneficiary of the mega infrastructure projects to be revived due to its strong track record in undertaking transportation and water projects. The suspension of the Group CEO Dato’ If Nitchiananthan for investigation into alleged misconduct triggered a correction in the share price. We believe the Executive Vice Chairman Tan Sri Ir Kunasingam, who will take over the functions of the Group CEO, will be able to lead the company with the support of HSS’ strong professional management team. Maintain our BUY call with a TP of RM0.82, based on target 2021E PER of 26x. Key risks are political uncertainties and slow roll-out of infrastructure projects.

Source: Affin Hwang Research - 18 Nov 2020