Affin starts coverage on HSS Engineers

KUALA LUMPUR: Affin Hwang Capital has initiated coverage on HSS Engineers with a “buy” call and a target price of RM1.20, giving an upside potential of 29%.

“We value HSS at RM1.20 based on CY18E PER of 15x, a discount of about 20% to the weighted average PER of 18.6x for global peers,” it said.

It added that HSS had proposed to transfer its shares from the ACE Market to the Main Market of Bursa Malaysia, which it believe would raise its profile among institutional investors.

Affin expects HSS to benefit from the implementation of large-scale infrastructure projects in Malaysia given its impressive track record. 

“We gather that it was appointed as a consultant to conduct scheme design and feasibility studies for the East Coast Rail Link (ECRL) and recently won the bid to provide reference design for the longest portion of the High Speed Rail (HSR),” it said. 

Affin noted that conventionally, engineering and construction design costs make up about 2-5% of the total project value. 

Its remaining order book was RM378.5mil as at Dec 31, 2016, and additional RM27.8mil worth of new contracts secured recently should help sustain earnings growth over the next 2-3 years. 

“We believe HSS has good prospects to win more contracts because it has long-established relationship with clients like Prasarana and MRT Corp; competitive pricing; and positioned as an engineering firm with 60% of employees being Bumiputera, an advantage in government projects. 

“We estimate there are RM141bil worth of infrastructure projects to be awarded like the HSR, ECRL and Pan-Borneo Highway (PBH) Sabah,” Affin said. 

The research house is forecasting 3-year EPS CAGR of 23% year-on-year in FY17-19E.

The next growth phase entails new contracts to be secured from its existing clients and venturing into regional markets like Indonesia. 

It added that HSS’ tender book in Indonesia was half the size of its tender book in Malaysia.