Excluding the large impairment on goodwill and impairment on receivables, HSSEB 4Q18 profit would have actually recorded a small profit of less than RM1mil translating to a very depressing core profit margins of only 2.1% vs the FY17 average profit margins of 10.3%.
This just shows how depressing is the current operating environment for the construction industry. Most construction companies are now chasing the same projects given that much of the large infrastructure projects that had helped improve the construction industries margins are now being reviewed, scale down, cancelled and delayed by the federal government. The intense competition has forced some companies to undercut others when tendering for projects. In most cases, the proposal made by these companies will barely result in any profit. Most of them are betting on variables orders to help push for profit later at the end of the project/ contract. Basically, they are betting to have a round of negotiation with their clients later hoping for the clients to agree on paying the additional variation orders (this was what happen in the O&G industry in FY15 and FY16).
Investors need to take note that a contract win does not necessarily translate to profit. The worst case is actually more probable with companies that submitted a too low offer having the risk of cost overruns (and in most cases they also face LAD penalties due to delay in delivering projects). For HSS Engineering, investors need to take note that even if some of the big projects like ECRL are put back to work, it would be at a lower cost which will be at the expense of contractors like HSSEB.
With this in mind (and couple with the challenging construction environment), investors need to be prepared for HSSEB to deliver margins that are similar to 4Q18 of single low digit. Assuming the company managed to deliver a profit of RM10mil in FY19, at the current share price, the company would be valued at a very lofty valuation of 53x PE. Let say profit managed to improved to RM20mil (which is higher than FY17 and FY18 core profit), the company would still be valued at 26.5x PE. Very high given that the average PE for construction now is less than 10x.
If you are looking to hedge your portfolio outside of HSSEB (due to its weak earnings outlook and relatively high valuation), I would recommend you to look at MBMR. (https://klse.i3investor.com/servlets/stk/pt/5983.jsp)
MBMR is a direct proxy to Perodua via its 22.6% interest in the company. Valuation is cheap at only 6.6x PE based on FY18 profit of RM166mil. PB is low at only 0.7x BV.
FY19 should deliver another profit growth year to the company. Profit growth will again be driven by the performance of Perodua (via MBMR 22.6% holdings in Perodua) from the still strong sales of new Myvi, sales of SUV Aruz and the introduction of the newly revamp Alza sometime in the 2H19. Aruz which commands a higher margin compared to other models, will help improve the total profit margin of Perodua (which will flow to MBMR’s bottom line as well).
MBMR is expected to achieve a profit of RM200mil in 2019. At the current share price, the company is being valued at only 5.5x which is a lot lower than the industry average of 15x PE. As an example, UMW (another company with exposure to Perodua) is currently trading at a PE multiple of almost 20x.
commonsense l still agree with your sensible writes up , but under PH government more construction infrastructure is going to take place and construction and steel stocks would subsequently benefitted from the theme play even with cost review and reductions .
New IPO: The onshore and offshore support services provider for the O&G industry, Steel Hawk Bhd aims to list on the Ace Market!
MQ Trader 2972 views | 2 d ago
0:17
New IPO: The largest mini-market player and a leading groceries retailer in Malaysia, 99 Speed Mart Retail Holdings Bhd aims to list on the Main Market!
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
edmen
277 posts
Posted by edmen > 2019-02-22 15:47 | Report Abuse
buy buy buy, resistance broken...