• Key highlight from analyst briefing is to expect a pickup in project flows in the next few months: Penang LRT and Pan Borneo Sabah Phase 1B stand out.

• HSS said that MRT 3 PMC works should continue in FY24F even in the worst case scenario of the civil packages being awarded in FY25F.

• We reiterate our Add call with a DCF-derived TP of RM1.31.

Key highlights from analyst briefing

• The key highlight from HSS’s analyst briefing today (28 Feb 2024) was its underlying bullish tone and belief that awards should pick up in the next 3 to 4 months. Two projects which stand out to us are Penang LRT and Pan Borneo Sabah Phase 1B.

• While waiting for the award of MRT 3 civil packages, HSS’s MRT 3 Project Management Consultancy (PMC) contract is undertaking three scopes of work i) land acquisition, ii) optioneering which is refining the alignment, and iii) submission of the railway scheme.

• HSS believes that even if the MRT 3 civil packages are not awarded by end-2024, it will be able to recognise c.RM50m in revenue for FY24F from the three scopes of work (vs. our FY24F revenue assumption of RM70m). However, if the awards happen soon, there should be upside to our FY24F revenue given the urgency to complete the project by 2030. HSS’s outstanding orderbook was RM1.48bn in Dec 23, of which we estimate 63% or RM938m to be its PMC contract for MRT 3.

• HSS did not provide guidance for new wins for FY24F but thinks the bear case scenario is RM200m. It did not provide a base or bull case scenario but thinks new orders could be very strong if some of its tenders come through. Our FY24F new win assumption is RM310m.

Tenderbook vs. prospects

• HSS distinguished between its current tenderbook and projects it deems as future prospects. Its current tenderbook is RM528m with a historical win rate of 50%. Projects in its tenderbook include four water consultancy projects worth RM20m each for Pengurusan Aset Air Berhad, PMC role for industrial related projects of RM80m-90m and two tenders for data centres.

• Projects which HSS deemed as future prospects would include 1) privatisation projects, and 2) closed invitations that are sometimes not part of its tenderbook which are awarded directly. The larger scale projects it is aiming for are 1) its lead design consultant role for Westports Phase 2 (RM100m-150m) Pan Borneo Sabah Phase 1B projects (c.RM300m), 2) Johor LRT, and 3) water privatisation projects in Sabah.

Contribution from overseas projects to rise

• Overseas projects contributed <5% of revenue in FY23 but HSS believes this can rise to 15-20% of revenue p.a. in the next 3-5 years.

• Two projects in Saudi Arabia look significant to us. The first is a landscaping project in Riyadh City where the PMC value could amount to RM200m-300m. HSS will have a local JV partner and its stake in the JV is being negotiated according to HSS. The second is a rail project led by Hill International, a US construction consultancy firm where HSS is the smallest partner. HSS said that its share of the PMC role could potentially amount to RM35m-40m.

Reiterate Add with a TP of RM1.31

• We reiterate our Add rating as we like HSS’s business model of being capex-light with high ROEs and at the front end of the construction value chain. Our DCF-based TP remains at RM1.31 (WACC: 9.6%, TG: 4.5). The stock trades at 16x FY25F P/E, which we believe is fair given its superior ROEs of 12-16% in FY24F-26F vs. sector average of 6%.

• A potential re-rating catalyst is faster awarding of MRT 3 and other projects. Downside risks are delays in awarding of MRT 3 and other mega projects.

Source: CGS-CIMB Research - 28 Feb 2024