HSS Engineers Bhd - Key Takeaways Post Results Briefing
Thu, 21-Aug-2025 07:42 am
by Team Coverage • Apex Research

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HSSEB (0185)

Target Price (RM)

0.75

Recommendation

Buy

  • HSSEB’s outstanding order book remains robust at RM2.1b. Management is guiding for an additional RM80m-120m in new awards over the remainder of the year. Meanwhile, tender book currently stands at RM510m, with management aiming for RM300m-500m in order book replenishment in FY26.

  • Phase 1 of the Baghdad Metro project has achieved 45% physical progress, with the Completion Certificate for the initial 10% milestone officially endorsed by the Mayor of Baghdad on 16th July 2025. The Group is currently awaiting formal acknowledgement from the Ministry of Planning, subsequent to which HSSEB anticipates receipt of c.RM10m.

  • We anticipate cash flow to strengthen over the coming quarters, underpinned by: (i) the receipt of 10% advance payment (c.RM2m) from the Davao BRT project in the Philippines in September; (ii) the first milestone payment (c.RM10m) from Baghdad Metro project expected in October; and (iii) progressive collections from other ongoing projects. Sustained positive operating cash flow remains critical, given the Group’s current reliance on bank overdraft facilities.

  • We maintain our BUY call with an unchanged target price of RM0.75 based on 7.2x P/E multiple applied to FY26F EPS of 10.3 sen and supported by a three-star ESG rating.

 

We left HSSEB’s 2QFY25 results briefing with the following key takeaways:

 

Healthy Unbilled Order Book. HSSEB’s order book remains robust at RM2.1b as at end-June 2025, equivalent to 10.3x FY24 revenue. Recent contract wins including two new data centre projects in Malaysia, a bus network project in the Philippines and package 2 of the Container Terminal project in India. The momentum is expected to carry over to 2HFY25 as management is guiding for an additional RM80m-120m in new awards over the remainder of the year, likely driven by water treatment, data centre and rail projects in Malaysia. Meanwhile, tender book currently stands at RM510m, with management aiming for RM300m-500m in order book replenishment in FY26. In comparison, we are projecting a more conservative RM250m in FY26F replenishment.

 

Update on Baghdad Metro. Phase 1 of the Baghdad Metro project has achieved 45% physical progress, with the Completion Certificate for the initial 10% milestone officially endorsed by the Mayor of Baghdad on 16th July 2025. The Group is currently awaiting formal acknowledgement from the Ministry of Planning, subsequent to which HSSEB anticipates receipt of c.RM10m. However, a key overhang remains as the local government has yet to appoint a main contractor for the project. While management anticipates Phase 2 to begin sometime in 2HFY2026, it will first require a main contractor to be appointed.

 

Cash Flow to Improve. We anticipate cash flow to strengthen over the coming quarters, underpinned by: (i) the receipt of 10% advance payment (c.RM2m) from the Davao BRT project in the Philippines in September; (ii) the first milestone payment (c.RM10m) from Baghdad Metro project expected in October; and (iii) progressive collections from other ongoing projects. Notably, operating cash flow improved to -RM0.9m in 2QFY25 from -RM12.6m in 1QFY25, reflecting improving collections and better working capital discipline. That said, sustained positive operating cash flow remains critical, given the Group’s current reliance on bank overdraft.

 

Earnings Revision. No change to our earnings forecasts.

 

Valuation. We maintain our BUY call with an unchanged target price of RM0.75 based on 7.2x P/E multiple applied to FY26F EPS of 10.3 sen and supported by a three-star ESG rating. We believe that greater clarity on the Baghdad project, coupled with improvements in operating cash flow, would provide catalysts for a further rerating.

 

Risk. Delays in project execution & delivery, foreign project exposure leading to potential geopolitical risk and lower-than-expected order book replenishment.

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