HSS seen as early beneficiary of infrastructure spending

HSS Engineers Bhd
(Jan 30, 79.5 sen)
Maintain buy with an unchanged target price (TP) of RM1.18:HSS Engineers Bhd expanded its order book to about RM587 million as at end-2019 from RM546 million as at end-September 2019. It secured new contracts worth RM210 million in 2019, but the reduction in scope of works for the Klang Valley Mass Rapid Transit Line 2 (MRT2) project reduced the net new contract wins to RM181 million.

Some of the key new contracts secured are for the Northern Corridor Economic Region, Pan Borneo Highway, Sabah, East Coast Rail Link and Johor Bus Rapid Transit. We understand that additional works could be awarded to HSS for these projects going forward.

HSS is bidding for over RM300 million worth of new contracts with good prospects to further expand its order book in 2020, including the water-related infrastructure projects, and Bayan Lepas Light Rail Transit.

The potential revival of the MRT3 and Kuala Lumpur-Singapore high-speed rail projects will also provide opportunities for HSS to win contracts as it had been involved in preliminary works for the projects. We maintain our new contract win assumption of RM250 million for 2020.

HSS and its partners lost the tender for the Large Scale Solar Phase 3 project as competition was stiff. However, it continues to explore projects that generate long-term recurring income that involve equity investments and operational and maintenance contracts.

We believe that potential news flow of new contract awards will drive the positive rerating of HSS’ share price. We reaffirm our “buy” call with a 12-month TP of RM1.18, based on a targeted 2020 price-earnings ratio of 26 times, which is below its five-year mean of 33 times. Key downside risks are delays in winning new contracts and execution risks. — Affin Hwang Capital, Jan 30