HSS seen in good position to weather expected slowdown in construction
LIKE most other construction stocks, HSS Engineers Bhd has had a bad week in the local equity market.
Since the reopening of the market after the 14th General Election (GE14), shares of HSS have come under selling pressure, resulting in a loss of 32% in value over the past five trading days alone.
While the counter has since rebounded after falling to its nine-month low of 85.5 sen on Wednesday, its closing price of 97 sen yesterday still represents a substantial loss of 29% year-to-date.
Be that as it may, according to Affin Hwang Capital, the sharp correction in HSS’ share price is an opportunity to buy the stock, citing the favourable structural growth story of the company.
Despite the uncertainty facing the local construction industry due to the Government’s decision to review several mega infrastructure projects in Malaysia, Affin Hwang Capital believes HSS is in a good position to weather the expected slowdown in new contract awards, given the company’s record-high order book and expansion in earnings base following the recent acquisition of SMHB Engineering Sdn Bhd.
HSS is principally involved in the provision of engineering and project management services including engineering design, project management, construction supervision and building information modelling services. Its acquisition of SMHB, an engineering consultancy firm with deep expertise in the water industry, is an initiative to expand its business in water infrastructure projects locally and abroad.
According to HSS executive vice-chairman Tan Sri Ir Kuna Sittampalam, since the completion of the group’s acquisition of SMHB in March 2018, HSS has seen its order book expanded to RM962.5mil from RM434.3mil as at end of December 2017.
The substantial order book – which includes packages awarded under the Klang Valley MRT Line 3 (MRT3) project, East Coast Rail Link (ECRL) and Kuala Lumpur– Singapore high-speed rail (HSR) projects, among others - is expected to give HSS earnings visibility over the next three to five years.
On how the plan of the new Government under Pakatan Harapan to review mega infrastructure projects in the country, Kuna says it is still too premature at this juncture to assess the potential negative impact arising from the decision.
“Currently, the Government is reviewing all major infrastructure projects and we are awaiting their directive,” Kuna says.
“Further to this, we are looking at possible upside in terms of increased local participation,” he tells StarBizWeek in an email.
In addition, Kuna says HSS is of view that the Government under Pakatan Harapan will give emphasis towards or institute more social infrastructure projects for the rakyat, hence opening up further potential opportunities in the areas of water infrastructure and public housing projects.
As for the group’s ongoing projects in the group’s order book, Kuna reveals that the majority of projects are already progressing well at an advanced stage.
“ECRL constitutes close to 11% of our unbilled order book, and we are close to completing the Reference Design Consultancy Package 05 for KL-Singapore HSR, with the remaining unbilled portion of approximately RM4mil.
“Apart from this, our order book does not include any other work related to the KL-Singapore HSR,” he points out.
“Currently, we do not foresee impact on our earnings as the committed projects in hand will provide earnings visibility in the next three to five years,” he says.
Meanwhile, Kuna says HSS will continue to focus on expanding its business by diversifying its revenue stream through regional expansion and water infrastructure projects and build a steady recurring income base over the long term. At present, the group is already involved in the Asean region, particularly in Indonesia and Philippines.