• 4Q23 missed expectations; we believe MRT 3 award is likely in 2H24F.

• Delay in MRT 3 could be compensated by three projects, but timing is key.

• Reiterate Add and raise our DCF-derived TP to RM1.31.

Reiterate Add, with a higher TP of RM1.31

We reiterate our Add call on HSS Engineers (HSS) with a higher DCF-derived TP of RM1.31 (WACC 9.6%, TG of 4.5%) as we roll over our base year to FY24F. 4Q23 core net profit was RM5.7m (+6% qoq), bringing FY23 to RM22m (flat yoy, 85% of our forecast). While 4Q23 was a decent quarter, it missed expectations due to a delay in awards for the MRT 3 civil packages. However, we think this is a timing issue; an award in 2H24F would see earnings recognition skewed to 4Q24F. We cut our FY24F EPS as we are more prudent in our assumptions on MRT 3 and the impact of its private placement exercise, but raise FY25F EPS (Fig 2). At our new TP of RM1.31, the stock trades at CY25F P/E of 16x, which we believe is fair given its superior ROEs of 12-16% for FY24F-FY26F. We continue to like HSS’s business model of being capex-light with high ROEs and at the front end of the construction value chain. Potential re-rating catalyst is faster award of MRT 3 and other projects. Downside risks are delays in award of MRT 3 and other mega projects.

MRT 3 is a timing issue, which could be skewed to 2H24F

We believe the biggest setback for HSS is the further extension of the validity period for MRT 3 civil packages. This is the fourth extension, with the period now ending in Mar 24, with possible award in 2H24F. This project was for a project management consultancy role (PMC) awarded in Aug 22 at a value of c.RM1bn. So far, profit recognition has been slow for HSS at c.6% until Dec 23, and would only pick up significantly once the three large civil packages (CMC 301, 302 and 303) are awarded. Once that happens, more engineers can be deployed and progress billings would pick up exponentially, in our view. HSS’s outstanding orderbook as at Dec 23 was RM1.48bn, of which we estimate 63% or RM938m to be its PMC contract for MRT 3. Nevertheless, in Dec 23, the Transport Minister said that the budget for land acquisition has been approved, and, in Jan 24, he added that this project was pending approval from the Finance Ministry.

Project pipeline looks promising; three awards likely by 1H24F

We think the MRT 3 delays could be partially offset by three main projects: i) its lead design consultant role for Westports Phase 2 (RM100m-RM150m), ii) Pan Borneo Sabah Phase 1B projects flood mitigation (c.RM300m), and iii) lead design consultant for PLUS Expressways lane widening (c.RM15m-20m). HSS is also currently involved in five PMC roles for data centre projects. HSS was awarded a RM145m PMC role for Pan Borneo Sabah Phase 1A (15 packages) in Apr 21. As Phase 1B will comprise 19 packages worth RM15.7bn, we estimate the PMC role to be worth RM300m. We understand from management there has been progress in the 33 high priority flood mitigation projects costing RM11.8bn. Out of this, HSS has submitted engineering design bids for three smaller projects and will be bidding for four larger projects. YTD-2024, HSS has won two smallish projects totaling RM15m, one of which is related to the water industry.

Source: CGS-CIMB Research - 28 Feb 2024