HSSEB: ANOTHER VALUE STOCK TO CONSIDER
Background. HSSEB is the largest local engineering consultancy and management firm that provides engineering and project management services to construction companies and governments. HSS provides engineering and project management services including engineering design, project management, construction supervision and BIM services. HSSEB’s expertise lies in wide range of sectors including building and structures, urban infrastructure, roads and highways, railways and metro systems, airports, ports and harbours, transportation planning, power generation and distribution, water resources and supply as well as sewerage systems. Its client base mostly from Malaysia. HSSEB was listed in ACE Market in Aug 2016, and the Company was transferred its listing to the Main Market of Bursa Malaysia in September 2017.
Consistent margin, low-risk and high barrier of entry business model. Typically, the engineering consultancy fee is about 2-5% of total project costs. The largest cost item for HSSEB is manpower cost, which is about 1/3 of revenue and the rest more on admins, systems and sub-consultants. As consultancy business eliminate underlying risks for construction businesses namely fluctuation of raw material prices, land acquisition and other social and regulatory issues, this business should consistently giving decent and stable margins. More importantly, this business is strictly governed by authorities such as Board of Engineers, CIDB etc. This create high barrier of entry for new entrants.
ECRL cancellation is not a surprise. The worst have already been priced in after the sell-down post GE14 as the stock went down as low as 45 cents in end of May. Hence, the sell-off in Thursday after Tun M announced ECRL cancellation should be just a one-day knee-jerk reaction. In fact, the cancellation should be viewed positively as now it is very clear on what the government’s stance on ECRL is.
Water is the next theme for HSS. HSS has 100% stake in prominent and biggest water consultant company, SPMHB. Last quarter, this unit started to contribute to the group’s bottomline. The biggest water restructuring in Selangor just completed recently after the disposal of SPLASH. Now it is a time for Federal Government to start rolling out NRW program. Quoting an article in 2016 by The Edge, to reduce NRW, government needs at least RM13b. This is just to reduce to 25% not 0% yet. Hence this clearly would benefit HSS’s unit, SPMHB in a big way.
Penang infrastructure spending to continue to support the company’s future orderbook. At least another RM50b will be spent in Penang to improve its infrastructure network. HSS, being a biggest engineering consultant company, should also benefit from this.
Valuation wise, HSS is currently trading at FY19 PER of around 13x. Consultant firms are always trading at very high valuation due to its stable business model, high barrier of entry and superior ROE. As such, engineering consultancy firm always be a takeover target with huge premium. For example, last year, UEM Edgenta sold its engineering consultancy business, OPUS ex-Malaysia operations at 82% premium to OPUS’s last traded price. Globally, US-based engineering consultant company, Jacobs Engineering bought its rival C2HM at huge 70% premium to its market value USD2.85b.
Technically, HSSEB will likely to test RM1.05 and RM1.20 resistances before going back to its pre-GE14 level of RM1.40-1.70.
Disclaimer: This is my personal opinion and not recommendation. Please ask your remisier or dealer representatives before making any decision. Trade at your own risk.
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