• HSS’ 2020 results were within market and our expectations. Net profit jumped 8.7-fold yoy to RM10.6m in 2020 from a low base in 2019. This was driven by higher revenue (-14% yoy) and improvement in profit margin
• Our core EPS forecasts is substantially unchanged with strong 2-year CAGR of 40% in 2021-22E driven by higher progress billings and RM200m new contracts p.a.
• HSS remains one of our top BUYs with a RM0.82 target price (TP), based on a 2021E PER of 26x. Key risk is political uncertainties delaying project roll-outs

Sustained Growth Momentum

HSS’ net profit of RM10.6m in 2020 came in close to consensus and our forecasts of RM10.3-10.4m. Revenue grew 14% yoy to RM170m on the back of higher progress billings especially for its East Coast Rail Link (ECRL) and Iskandar Bus Rapid Transit (BRT) projects. EBIT jumped 59% yoy to RM27.8m in 2020 with high-margin design works contributing to revenue. EBIT margin improved 4.6ppt to 16.4% in 2020. EBIT margin is expected to improve further with high-margin detailed design works contributing more to revenue

Good Prospects to Expand Its Order Book

HSS’ remaining order book remains high at RM443.4m as at end-2020 with net new contracts secured of RM32m. It remains bullish on expanding its order book with current submitted tenders worth RM300m. Historical success rate for tender projects have been high at 50%. HSS is also working directly with the state and federal governments on several mega infrastructure projects, eg, Rasau Water Treatment Plant and Klang Valley MRT Line 3. More imminent contracts to be awarded in 2Q21 include Westports expansion Phase 2 and Pan Borneo Highway (additional works).

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. 2021E core PER of 17x is undemanding considering strong 2-year core EPS CAGR of 40%. 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 - 1 Mar 2021