Risk-reward still attractive post-MRT 3 win
HSS remains our preferred small cap construction pick post-MRT 3 win.
Order book catapults to an all-time high; job flow outlook remains healthy. We raise our FY23-24F EPS by 24-26% on conservative MRT 3 assumptions.
Reiterate Add on attractive risk-reward. We raise our TP by 24% to RM0.85.
Stamped its mark in the EPMS space with MRT 3
HSS’s recent MRT 3 win (4 Aug 2022) has made its mark in the domestic Engineering and Project Management Services (EPMS) space, as being the sole company to be awarded the single largest RM998m project management consultant (PMC). Based on our clarifications with the group regarding the sizeable PMC contract, we gathered that not only the contract value includes the full range of construction supervision and project management scopes, HSS will also, for comparison purposes, take on the equivalent role of a project delivery partner (PDP) for MRT Corp. However, the structure of the PMC package does not come with separate fees as in the case of the previous MRT projects under the PDP structure. For this PMC package, we gathered that HSS will deploy a team of up to 350 staff (including engineers) over the 8-10 year construction period.
Order book hits an all-time high; prudent on EPS impact
The RM998m PMC contract nearly doubles order book to an all-time high of RM1.5bn or a visibility of 6.8x FY22F order book-revenue cover. Using a straight line 8-year period and 1QFY22’s 7% net profit margin, this would raise FY23-24F EPS by a massive 52-59% (RM8.3m p.a.). We prudently assume 10% of total contract value would flow through in FY23-24F (vs. 25% on a straight line basis or RM119m p.a.) due to 1) the likely gradual deployment of engineers over the next 1-2 years to accommodate for the time required to fully award all civil works packages before works commence, and 2) potential delay risks. Hence, we raise our FY23-24F EPS by 24-26% to account for MRT 3’s contribution.
Good visibility of EPMS opportunities in the pipeline
Based on our industry checks, we are encouraged that new sizeable EPMS opportunities have emerged which focus on new highways in the Klang Valley, rail projects in Johor and water and rail projects in Sarawak. For HSS, key projects to look out for in the next 6-9 months include: 1) Pan Borneo Highway (PBH) Sabah phase 2, 2) PJD Link Highway, 3) KL Northern Dispersal Highway; KL NODE, and 4) Johor LRT (see Figure 1).
Share price laggard with attractive risk-reward; TP raised to RM0.85
In our view, positives from the MRT 3 PMC award and healthy order visibility are not fully reflected in share price (+15% YTD but still 21% lower than its peak of RM0.61 prior to the full economic reopening in Oct 21). Due to the EPS upgrades, we raise end-CY22F TP by 24% (+16.4 sen) – still based on 24x FY22F P/E, in line with average P/E of global peers. We reiterate our Add rating as HSS remains a small cap laggard and one of the main beneficiaries of MRT 3. Re-rating catalysts: contract wins. Downside risks: project delays and weaker earnings