We remain positive on HSS Engineers Bhd ("HSSEB"). Share price had tumbled 33% due to the uncertainty in some of the mega infrastructure projects. Current Tun M's trip to China may bring much clarity and any positive news will provide catalyst for HSSEB and the construction sector. BUY with target price of RM1.28 based on 17x PER FY19 as per its closest related peers. 

The synergies of SHMB acquisition has started to bear fruit from its maiden contribution to HSSEB bottom line evidenced by its recent 2Q18 results where 1H2018 revenue jumped 33% while overall net profit rose by 27% and net margins improved significantly from 7.8% in 2Q17 to 12.5% in 2Q18. 

HSSEB's orderbook of RM411m and SHMB's RM219m totalling RM630m remains robust which provides earnings visibility until 2020. This amount does not take into consideration of the RM273m MRT3 contract which according from the Ministry of Transport, has been put on hold or postponed. Should these contracts be revived, this may see revival of its fortunes. HSSEB is well positioned to capture the water infrastructure works as the long-awaited conclusion of the restructuring of Selangor water treatment and distribution. 

HSSEB's balance sheet remains healthy with net gearing at only 0.13x even after completing SHMB acquisition amounting RM270m. Earnings growth for FY19 is projected to rise 38% underpin by strong orderbook focusing on potential specialised water related infrastructure services projects with higher margins. 

Source: Rakuten Research - 20 Aug 2018