Background

HSSEB has some 15 years of engineering and project experience. Their expertise cuts across a wide array of sectors such as urban infrastructure, roads and highways, railways and metro systems, building and structures and transportation planning etc.

HSSEB has three pillars of core services namely: (i) Engineering services which comprise engineering design and construction supervision, (ii) Project Management, and (iii) Building Information Modelling (BIMS).

Key takeaways

Management kicked off explaining each of their respective division. To recap, Engineering Design is the stage in which soil investigation is done and they will propose design plans to their respective clients for the building/infrastructure. Post design phase, they will move on to construction supervisions where standing supervision is deployed to site to monitor the contractors in order to ensure timely completion. This is also the stage where they monitor and administer payment to the contractors.

Project management is described as a service in which they will act on behalf of the clients – a role whereby they will oversee the entire process from reviewing the design consultants’ drawings, project budgeting, and monitoring the construction progress by contractors till completion. Typically, the role is only extended by companies, which are inexperienced within the construction field or for large project.

Lastly, BIMS services allow contractors, architects and engineers to work hand in hand by enabling the building structure to be viewed in 3D to avoid unnecessary conflict during the construction phase i.e. air-con duct might intersect with electrical wirings which are not seen in 2D views.

Management guided that through a rule of thumb, their contract size share would be in the range of 4-5% of total construction value for engineering design and construction supervision while project management would be able to command c.3-6% of total construction value. That said, the potential amount of orderbook secured depends very much on the type and size of the entire project.

Outlook

Currently, HSSEB has an outstanding order-book of c.RM385m.

Moving forward, HSSEB has a number of expansion plans in the pipeline. Plans include: (i) entering the facilities management within the hospitality sector to build a recurring stream of income which complements their existing business, (ii) expand their design capabilities into the water and power business, i.e. desalination of seawater and wastewater treatment plants, and (iii) solar business.

While management shared the huge plans, we are NEUTRAL on the expansions at the moment as earnings contributions are not expected in the near term.

Risk

• Low replenishment rate.
• Slowdown in construction jobs.
• Litigation actions by clients should design fail expectations.

Conclusion

Currently, HSSEB is trading at a trailing 12M PER of 21.3x which is above our small-mid cap contractors’ PER range of 9-13x.

Source: Kenanga Research - 19 Apr 2017