HSS Engineers Berhad One-stop engineering services provider

Transcription

1 21 July 2016 IPO Note HSS Engineers Berhad One-stop engineering services provider Non-rated Fair Value (FV): RM0.59 INVESTMENT HIGHLIGHTS Outstanding orderbook of RM366m Geographical expansion plans Expanding capabilities to include facility management Potential in Building Information Modelling (BIM) services FV of RM0.59 based on PER 16x FY17F EPS of 3.68sen Outstanding orderbook of RM365.9m will be billed progressively over the next 2 to 5 years. The unbilled orderbook was as of May 31, The total outstanding orderbook comes from more than 15 projects awarded by various clients, ranging from highway, railway, airport to power plant (Refer Page 4). The firm s 15 years of track record and experience in various projects is hard to replicate. Collectively, its key management team have an average of more than 30 years in the engineering consultancy services industry. Geographical expansion plans. Its overseas turnover ranged from 2% to 6% in the past three years. The group already has an office in Chennai, India and plans to further expand the operations there through a partnership with the locals. It targets to use RM15m or 47% of its IPO proceeds to expand the operations there. The opportunity in India lies in the government efforts to develop the nation s infrastructure with an estimated allocation of USD1.2 trillion. Besides India, it plans to enter the Middle East and Indonesia. Expanding capabilities to include facility management. The firm targets to provide support services to the utilities sector. For FY15, power and water only make up 1% of its total revenue (Refer Page 5). It intends to increase the revenue from this discipline in the future due to strong government support for the water sector. Tenaga Nasional Berhad s RM10.8b capex will also boost demand for the power sector. It plans to use RM9m of its IPO proceeds for this purpose. Besides that, it also plans to offer facility management services, which could provide recurring income to the company. The service is complementary to its existing business and can be supported by its BIM capabilities. Potential in BIM services. This division was only started in 2012 and currently contributes some 1% to the group s net income. In the more advanced markets like US, Australia and Singapore, BIM is widely adopted as part of the regulatory requirement. While the contribution from this unit is relatively small for now, we believe the potential for this segment to be big as the local construction industry progresses. Essentially, BIM is the process of designing a building or facility using 3D modelling and computer simulation. RETURN STATS IPO Price Fair Value Expected Share Price Return MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures RM0.50 RM % Expected Dividend Yield - Expected Total Return +18% STOCK INFO Existing number of shares 140.2m Number of new shares upon listing Listing Bursa/ Bloomberg Sector Syariah Compliant Market Cap upon IPO IPO TIMETABLE m Ace Market 0185/ HSS Trading/ Services No RM159.54m DATE Opening of application 29 June 2016 Closing of application 22 July 2016 Balloting of applications 27 July 2016 Allotment of shares 8 Aug 2016 Listing on Ace Market 10 Aug 2016 Utilisation of Proceeds Amount Expansion plans RM24m (75.2%) Repayment of borrowings RM4m (12.6%) Working capital RM0.71m (2.2%) Estimated listing expenses TOTAL Major Shareholders (%) RM3.2m (10%) RM31.91m Victech 31.3 Flamingo 31.3

2 We have a non-rated fair value of RM0.59 based on PER 16x FY17F EPS of 3.68sen. The 16x PER ascribed to HSS is a slight discount to Bursa Malaysia Construction Index s PER of 16.5x. We think the slight valuation discount is justified due to its low market cap compared to other construction companies but, on the other hand, buttressed by its potential for overseas expansion, good pre-tax margin and strong balance sheet. INVESTMENT STATISTICS FYE Dec FY13 FY14 FY15 FY16F FY17F Revenue Cost of sales Profit Before Tax Profit After Tax EPS (sen) PER EPS growth NA 37% 11% 6% 9% PBT margin 9% 13% 11% 11% 11% Source: Company, MIDF Research Forecast BUSINESS OVERVIEW HSS Engineers Berhad has 15 years of experience in engineering and project management. It is one of the largest local engineering firms. It employees more than 600 people, out of which, about 250 or 42% of them are engineers. The group s businesses can be classified into three main segments: engineering services, project management and building information modelling. Engineering services can be further sub-divided into engineering design and. Going forward, the company intends to offer facility management as its new core service. It also intends to grow its water and power segments. It commands 2.8% of the RM4.24b worth of engineering and project management services contracts available in Malaysia in The market size is expected to grow at a CAGR of 6.5% from 2015 to 2020, according to market researcher Protégé Associates. Its top two clients in the past 3 years had been Prasarana Malaysia Bhd and Mass Rapid Transit Corp Sdn Bhd. They contributed 29% and 22% respectively to HSS Engineers FY15 revenue. 2

3 FINANCIAL HIGHLIGHTS 3-year net profit CAGR of 22.9%. Net profit increased from RM6.71m in FY13 to RM10.13m in FY15. The growth in net profit is supported by the expansion of its topline, which was up from RM101.45m in FY13 to RM121.5m in FY15. Future growth is underpinned by its unbilled orderbook of RM365.9m, which will be billed progressively over the next 2 to 5 years. Pre-tax profit margins of 9% to 13% in the past 3 years. We expect the group to register similar levels of PBT margins in FY16 and FY17F. This is because of the group s vast experience across different disciplines in engineering and the scale that had been built over the years. Net cash position post IPO. The company will be in a net cash of RM25.6m following the floatation of its shares compared to a net gearing of 0.13x before IPO. That translates into 8 sen per share, which is 16% of the IPO price. VALUATION We value the stock at RM0.59 based on PER 16x FY17F EPS of 3.68sen. There is no other pure engineering services provider listed on Bursa hence there is no direct comparison. The 16x PER is a slight discount to Bursa Malaysia Construction Index s PER of 16.5x as HSS outlook is dependent on the construction sector. The 16x PER ascribed is justified based on HSS track record, the growth potential of the construction industry in Malaysia, and the developing markets that HSS targets to penetrate. The outlook for the domestic construction sector will be buoyed by the slew of mega projects and infrastructure development under the 11 th Malaysia Plan. KEY INVESTMENT RISKS Growth and expansion risks. The group intends to offer new services such as facility management and venture overseas for growth. Any potential failure in the implementation of these plans may incur costs, thus adversely affect its business operations and financial performance. The group also relies on getting jobs on a project-basis. If the orderbook replenishment stalls, its financial performance could also be negatively affected. Operational risks. The business prospects of HSS are dependent on the outlook of the construction industry. It may be susceptible to potential liability claims, project delays, shortage of skilled workers as well as other regulatory risks. As a services provider, the group is highly-dependent on its specialised personnel. The departure of any key management or several technical key members at the same time could be detrimental to HSS operations. Syed Muhammed Kifni Ng Bei Shan ng.bs@midf.com.my

4 APPENDIX HSS Engineers Bhd s On-going Projects Project Clients Unbilled as at Dec 31, 2015 (RM m) Commencement / Completion date Job Scope Bukit Raja integrated township Sime Darby USJ Development Sdn Bhd 1.8 Dec 1999/ 2020 LRT- Ampang line extension Prasarana Malaysia Bhd 35.7 Dec 2008/ 2016 Maju Expressway Extension Maju Holidngs Sdn Bhd 9.6 May 2010/ 2020 Engineering design to KLIA 5,500 houses for Brunei s Brunei Economic 0.5 Sept 2010/ 2016 Project management National Housing Scheme Development Board MRT Line 1- Jajaran Buloh- Mass Rapid Transit 17.4 Feb 2011/ 2017 Project management Kajang Corp Sdn Bhd West Coast Expressway from IJMC-KEB joint venture 9.6 June 2011/ 2018 Engineering design Tg Karang to Banting Westports Construction and completion land reclamation works, wharf and yard Westports Malaysia Sdn Bhd 12.7 July 2010/ 2016 North-South Expressway Fourth Lane Widening between Nilai and Seremban Sungei Besi-Ulu Kelang Elevated Expressway Implementation of 3 major roads project and undersea third link tunnel in Penang Projek Lebuhraya Utara-Selatan Bhd Turnpike Synergy Sdn Bhd Unit Perancang Ekonomi Negeri Penang 3.6 July 2011/ Jan 2012/ Oct 2014/ 2019 Engineering design Metro project in Penang Gamuda Bhd 10.5 Dec 2014/ 2018 Engineering design Temporary common camp facilities and infrastructure UEMB-PROPEL Consortium 3.4 Oct 2014/ 2016 for RAPID, Pengerang Kwasa Damansara Township Kwasa Land Sdn Bhd 10.1 July 2014/ 2020 Project management Development East Klang Valley Ahmad Zaki Sdn Bhd 4.6 Apr 2015/ 2019 Project management Expressway MRT line 2- Jajaran Sg Mass Rapid Transit Apr 2015/ 2022 Project management Buloh-Serdang-Putrajaya Corp Sdn Bhd West Coast Expressway from IJMC-KEB joint venture 19.2 Dec 2015/ 2019 Construction supervision Tg Karang to Banting TOTAL

5 Completed projects from FY13 to FY15 Project Clients Contract value (RM m) South Klang Valley Expressway Lebuhraya Kajang- WCT Construction Sdn Bhd, Seremban (LEKAS) IJM Construction Sdn Bhd Commencement / Completion date SKVE Holdings Sdn Bhd 20.8 Oct 2006/ Sept April 2004/ July 2014 LCCT Malaysia Airport Holdings Bhd 9.7 Dec 2009/ Oct 2015 East Coast Railway East Coast Economic Region 8.7 Dec 2009/ Development Council Dec 2015 Manjung Power Plant Mudajaya Corp Sdn Bhd 6.7 Sept 2011/ Dec 2015 LRT structural Prasarana Malaysia Bhd 3.5 July 2008/ assessment and July 2013 condition monitoring Ikea store at Cochrane, Cheras Source: Company Ikano Cochrane Sdn Bhd 3.0 July 2013/ Nov 2015 TOTAL 71.8 Job Scope Project management Engineering design Project management Revenue contributors for FY15 Source: Company 5

6 MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad ( X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be <-15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 6