AFFIN Hwang Capital Research has reiterated its buy call for HSS Engineers Bhd with a 12-month target price of RM1.18, based on a target 2020E PER of 26x. It believes that potential news flow of new contract awards will drive the positive re-rating to its share price. 

“We believe that HSS, an engineering consultancy, is an early beneficiary of the acceleration in infrastructure spending and revival of large-scale projects by the Malaysian government,” the research house said in a note on Jan 30. 

HSS’ order book increased to about RM587 mil as at end-2019 after it clinched the Johor bus rapid transit (BRT) contract. 

“With more infrastructure projects in the pipeline, we believe prospects for HSS to grow its order book will improve in 2020. We expect the 4Q19 earnings to reverse the 9M19 loss,” it said.

Several new contracts such as the Pan-Borneo Highway in Sabah (PBH Sabah), the Johor BRT and additional works for the East Coast Rail Link (ECRL) were secured in 4Q19. 

HSS posted a net loss of RM1.6 mil in 9M19 due to lower revenue following the completion of the high-speed rail (HSR) contract, reduction in contract value for mass rapid transit 2 (MRT2) and works on the ECRL being suspended. 

“We expect HSS to report a net profit of about RM5.3 mil in 4Q19 to push it back into the black for 2019 with a net profit of RM3.7 mil.

“We expect the acceleration in progress billings on existing projects and the net new contracts secured of RM181 mil in 2019 to spur earnings to jump to RM22.7 mil in 2020. We maintain our earnings forecasts,” it said. 

Works on PBH Sabah commenced before the contract was awarded and hence billings will be lumpy in 4Q19 with the contract signed. 

Works on the ECRL contract resumed in 4Q19; the contract was suspended previously due to the renegotiatios between HSS’ main contractor client and the government. 

HSS’ share price opened 1.27% higher at 78 sen before the midday break on Jan 30.

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