Affin Hwang gathers that HSS may make full impairment for legacy receivables to clean up its books in 4Q22 amounting to about RM6m in bottom-line impact. The receivables relate to work done for a privatised highway concession company that is undergoing a debt restructuring exercise.
The research house understands that certain parties are interested to come in as a white knight to take over the concession company. HSS could recover a partial/full amount of the RM11m receivables owed by the latter if a deal is struck.
Since it is unusual for HSS to incur bad debts and most of its contracts are government projects, Affin classifies the impairment as an exceptional loss in its earnings forecasts. Mostly contracts secured through open tender HSS’ remaining order book of RM1.47bn as of end-3Q22 comprises mostly contracts secured through open tender, which includes the RM998m Klang Valley MRT Line 3 (MRT3) Project Management Consultant (PMC) and RM145m Pan Borneo Highway (PBH) Sabah Phase 1A PMC contracts. The new unity government has said that contracts awarded will not be reviewed and only contracts pending award through direct negotiations will be reviewed. Hence, Affin believes most of HSS’ secured contracts in its order book will not be affected by the current review by the new government; except an RM5m consultant contract for the Klang Valley Double Tracking Phase 2 (KVDT2) upgrading project, which was procured via direct negotiation but not awarded yet.
Better profit margins on the cards
Affin also gathers that HSS is realising better profit margins on certain engineering design contracts near completion, which should boost 4Q22 earnings. Progress billings for the PBH Sabah Phase 1A project are likely to accelerate. Thus, it lifts its core EPS by 32% in 2022E and 2-3% in 2023-24E. The house also notes good prospects for HSS to bid for PBH Sabah Phase 1B, which could be double the contract value of Phase 1A. The 2023E core PER of 8x is attractive considering moderate 2-year core EPS CAGR of 15% in 2023-24E from a high base in 2022E.
Reiterate BUY. Downside risk: slow rollout of infrastructure projects.
All in all, there is a prospect for a strong earnings recovery for HSS, and the risk of government contract cancellations has eased following reassurances provided by the new Ministers. HSS’ 2023E core PER of 8x is attractive considering its (1) moderate 2-year core EPS CAGR of 15% in 2023-24E from a high base in 2022E; (2) below sector average core PER of 15x and close to the stock’s 2-year 1 standard-deviation (1SD) below mean core PER of 8x. Affin reiterates its BUY call on HSS with a 12-month TP of RM0.70, based on an unchanged target 2023E PER of 14x.
