HSS Engineers Bhd - Strong Order Book, but Cash Flow Concern Remains
Fri, 23-Jan-2026 07:39 am
by Tan Wai Wern • Apex Research

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HSSEB (0185)

Target Price (RM)

0.35

Recommendation

Hold

  • HEB has secured a PMC contract worth RM22.0m for the EPCC of a data centre in Bagan Datuk, Perak. Assuming a GP margin of 40%, the contract is expected to contribute c.RM8.8m (or 10.7% of FY26F gross profit) over FY26F-FY27F.

  • This represents the Group’s first announced win for FY26, bringing its outstanding order book to RM2.3bn, representing a book-to-bill ratio of 9.6x. Meanwhile, tender book currently stands at RM480m, with management aiming for RM300m-RM350m in order book replenishment in FY26.

  • We downgrade our call to HOLD (from BUY) with lower target price of RM0.35 (from RM0.75) based on SOP valuation supported by a three-star ESG rating.

 

Secures Project Management Consultant Contract Worth RM22.0m. HEB clinched a RM22.0m project management consultant (PMC) contract for the engineering, procurement, construction and commissioning (EPCC) of a 10.06MW data centre in Bagan Datuk, Perak. Work is expected to begin on Dec-25 and is slated for completion on June 2027. With this award, the Group’s total contract secured for FY26 rise to RM29.5m.

 

Our View. We view this contract win positively as it provides the group stronger earnings visibility through FY27. At an estimated 40% gross margin, the project is expected to contribute RM8.8m in gross profit over its 19-month timeline, representing c.10.7% of our FY26F gross profit. While the award demonstrates HEB’s ability to secure projects early in the fiscal year, we remain cautious on the Group’s broader growth prospects given limited scale and project pipeline visibility.

 

Update on Baghdad Metro. Although Phase 1 of the Baghdad Metro has reached 50% completion, the Group has recognised just 37% to be prudent. Following previous engagements with the Ministry of Planning, management was informed that the first payment of USD10.5m will be disbursed in tranches, with an initial USD1.5m expected to be received shortly, pending approval from the Ministry of Finance. The Group has also submitted an invoice of USD3.0m for the second tranche. That said, a key overhang remains. The local government has yet to appoint the main contractor for the project, a prerequisite for full-scale execution. This has resulted in the anticipated commencement date for phase 2 of the project being pushed back from 2HFY26 to 1HFY27, causing further timing uncertainty to the project’s revenue recognition.

 

Deterioration in Cash Flow. The Group recorded a net operating cash outflow of RM3.5m in 3QFY25, largely due to an increase of RM9.2m in contract assets. The rise in contract assets was driven by the Baghdad project, where revenue has been recognised but billing to the JV entity can only proceed once funds are received from the Baghdad authorities. Separately, the Group continued to prioritise collections from its Pan Borneo and ECRL projects, achieving monthly inflows of roughly RM4.6m. Post-3Q25, HEB has successfully collected an estimated RM12m from these projects, which strengthens its cash position into the coming quarter.

 

Healthy Unbilled Orderbook. Previous contract wins, including the Klang River Flood Mitigation project (RM32m), Bayan Lepas LRT Packages 3, 4 and 5 (RM30m), the Port Dickson Water Treatment Plant & Distribution System (RM17m), the Tuna Tekra Container Terminal development in India (RM10m), and the extension for KKR Pan Borneo 1A (RM37m), have lifted the Group’s FY25 contract awards to RM300m, surpassing our earlier full-year estimate of RM200m. Alongside its latest award, the Group’s outstanding order book has been lifted to RM2.3bn, equivalent to a healthy book-to-bill ratio of 9.6x. The Group’s tender pipeline remains sturdy at RM480m, with management targeting RM300m–RM350m in new order replenishment for FY26, underpinned by steady prospects in Malaysia’s water treatment and flood mitigation sectors.

 

Outlook. The Group’s near-term outlook remains challenging as cash flow concerns persist due to swelling contract assets, particularly from the Baghdad projects where billing continues to lag revenue recognition. Although receivables from Pan Borneo and ECRL have started to improve, recent collections may not be adequate to ease liquidity constraints. Given the inconsistent project pipeline and uncertain timing of cash inflows, operational visibility remains limited.

 

Earnings Revision. We take the opportunity to impute the valuations of the Group’s 40% stake in the 95MW Hilir Perak solar project by applying a DCF valuation (WACC: 6.3%, tariff: 16sen/kWh) with an estimated IRR of 7.1%. We project losses from associates and joint venture of c.RM8.1m over the next two FY, mainly attributable to financing costs arising from the project’s 80:20 debt-to-equity structure. Earnings contributions are expected to turn positive from FY28 onward, with an estimated profit of c.RM2.5m. We have also increased our FY25F order book win assumption from RM200m to RM300m to incorporate FY25’s contract wins, while keeping FY26F/FY27F assumptions unchanged. We have excluded projected revenue from Phase 2 of the Baghdad Metro project for FY26F and extended the development timeline for Phase 1 to account for ongoing execution delays. Consequently, our CNP estimates for FY25F/FY26F/FY27F have been adjusted to +5.2%/-53.2%/-31.8%, respectively.

 

Valuation. We cut the applied P/E multiple for the Services segment to 5.1x (from 7.2x), reflecting slower-than-anticipated execution across its key projects. This revision lowers our SOP-derived target price to RM0.35 (from RM0.75), supported by a three-star ESG rating. We downgrade our call to HOLD (from BUY). A re-rating is contingent on improved execution visibility on the Baghdad project and a sustained recovery in operating cash flow.

 

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

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