HSS Engineers Bhd (HSS) remained positive on its 2024 outlook and expects greater clarity on project flows in March to April, according to CGS-CIMB.
The research house said HSS, who participated in its 16th Annual Malaysia Corporate Day on Jan 4, carried the same positive outlook it shared in 2023.
“While it did not provide guidance on new project wins for FY24F, it believes this will be a better year compared to FY23F. 9M23 core net profit was up 43% year-on-year (YoY) and project replenishment was RM300 million.
“The company also thinks there will be greater visibility on project flows by March and April 24. Its current tender book is RM442 million, with historically a 50% success rate,” it said in its Company Note today (Jan 10).
CGS-CIMB reiterates its ADD Call on HSS for its capex-light model and market-leading position in the front-end of the construction value chain.
“The DCF-derived TP is at RM1.21 (WACC: 9.4%, TG: 4.5%). At our TP, HSS will trade at 16.6x FY24F P/E, which is still below its post-Covid-19 mean,” it said.
However, the research house said the biggest setback for HSS is the further extension of the validity period for MRT 3 civil packages, as it is now on the fourth extension, with the period now ending in March 24.
“Nevertheless, recent news from the Transport Minister that land acquisition will commence more meaningfully this year over a two-year timeline gives some assurance that awards could be imminent.
“HSS outstanding orderbook as at September 2023 was RM1.49 billion, of which we estimate 60% to be its project management consultancy (PMC) contract for MRT 3.
“For its current PMC role for MRT 3, it is still undergoing optioneering and land acquisition work and we see only a strong pick-up in revenue recognition once the three large civil packages for MRT 3 are awarded.
“Once that happens, more engineers can be deployed and progress billings will pick up exponentially, in our view,” it added.
CGS-CIMB said the slack from MRT 3 delays could be picked up by other projects, such as its lead design consultant role for Westports Phase 2, with contract value of around RM100 million to RM150 million.
“Besides this, we believe the more immediate wins could be for flood mitigation, Penang LRT and Pan Borneo Sabah Phase 1B projects.
“A total of 33 high priority flood mitigation projects costing RM11.8 billion will be rolled out, per Prime Minister Anwar Ibrahim’s Budget speech in Oct 23. Out of this, HSS has submitted engineering design bids for 3 smaller projects worth around RM500 million.
“For Pan Borneo Sabah Phase 1B, the awards should happen progressively soon. HSS was awarded a RM145 million PMC role for Pan Borneo Sabah Phase 1A (15 packages) in April 21. As Phase 1B will comprise 19 packages worth RM15.7 billion, we estimate the PMC role to be worth RM300 million,” it said.
It said HSS also spoke about its overseas ventures in Japan, where it is working with management consulting company Index on facilitating private and public partnership projects (PPP) with the Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development.
It added it is also working on a waste-to-energy plant in the Philippines, for which, given the grants provided, HSS projects equity internal rate of return (IRR) has risen to 17 to 18% from 4%.
The downside risks of its call are slower rollout of projects and single project risk from the MRT 3 PMC contract while re-rating catalysts are clinching more projects and a quicker awards process.
