HSS Engineers Bhd - Comfortably Exceeds Expectations
Thu, 26-Feb-2026 08:47 am
by Tan Wai Wern • Apex Research

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HSSEB (0185)

Target Price (RM)

0.50

Recommendation

Buy

  • HEB delivered 4QFY25 CNP of RM9.4m (-12.1% YoY; +7.5% QoQ), bringing its FY25 results to RM30.0m, after including exceptional items. This represents 120.4% of our forecast and 180.6% of consensus estimates. The outperformance was driven by stronger-than-expected operating margins.

  • The Group’s total order book currently stands at RM2.2bn, translating into a healthy book-to-bill ratio of 9.0x.

  • Given the Group’s consistently stronger-than-expected operating margins and normalised tax rate, we adjusted our FY26F and FY27F forecasts. As a result, our CNP estimates rise by +17.4%/+15.0%, respectively.

  • We upgrade our call to BUY (from HOLD) with higher target price of RM0.50 (from RM0.35) based on SOP valuation supported by a three-star ESG rating.

 

Results above expectations. Excluding exceptional items, specifically RM9.2m of impairments relating to projects such as BRT Johor and Ship-To-Ship Hub at JB Port Waters, HEB delivered 4QFY25 Core Net Profit (CNP) of RM9.4m (-12.1% YoY; +7.5% QoQ). Including earlier non-recurring expenses, FY25 CNP came in at RM30.0m, representing 120.4% of our forecast and 180.6% of consensus estimates. The outperformance was driven by stronger-than-expected operating margins, reflecting the benefits of cost optimisation initiatives implemented in June 2025.

 

YoY. CNP fell 12.1%, as net margin contracted 359bps to 14.3%. The decline was mainly underpinned by higher administrative (+19.2%) and tax expenses (+69.7%). Results were further weighted by the increase in finance cost (+58.0%) as the Group has achieved financial close on its Corporate Green Power Programme (CGPP) project in November 2025.

 

QoQ. All business segments recorded stronger revenue recognition this quarter, led by the engineering design segment, which posted a 91.3% QoQ increase driven by steady progress across several newly secured projects. As a result, the Group revenue rose 39.7%. However, CNP grew at a slower clip at 7.5% due to the recognition of deferred tax liabilities arising from taxable temporary differences on its Baghdad income, lifting quarterly tax expense to RM6.3m versus a tax reversal of RM3.6m in the preceding quarter.

 

Update on Baghdad Metro. The Group is in the process of securing the first tranche payment of USD1.5m. In early February, the Group has received formal approval from the Minister of Finance to proceed with the execution of the Letter of Credit (LC). Subsequently, the Group engaged the Trade Bank of Iraq to execute the LC on 23 February. We view this development positively, as it demonstrates the Group’s ability to receive payments from the project, thereby alleviating concerns over potential impairments. Meanwhile, the Group has initiated the request for the second tranche payment of USD3.0m to expedite the overall collection timeline.

 

Improvements in Cash Flow. The Group generated a net operating cash inflow of RM10.2m in 4QFY25, driven by higher collections of RM51.0m, compared with an average quarterly collection of RM39.1m in the first nine months of FY25. This development is constructive for the Group’s financial position, reflecting improving cash conversion as projects advance. Despite a RM11.3m financing cash outflow arising from higher pledged deposits and overdraft utilisation, net gearing improved to 0.16x from 0.18x, underscoring continued balance-sheet improvement.

 

Healthy Unbilled Orderbook. YTD, the Group has secured RM33.0m of new orders across five projects, lifting its total outstanding order book to RM2.2bn, which translate into a healthy book-to-bill ratio of 9.0x. Meanwhile, the tender pipeline remains robust at c.RM540m, with the Group targeting RM300m in new order wins for FY26, supported by favourable opportunities in domestic water treatment, flood mitigation and data centre projects.

 

Outlook. The Group’s near-term outlook has improved as management makes progress in addressing key concerns, notably collections from the Baghdad Metro project and previously negative operating cashflow. That said, we remain cautious, as clearer execution visibility across ongoing projects and a sustained recovery in operating cash flow will be critical in shaping the Group’s near-term prospects.

 

Earnings Revision. Given the Group’s consistently stronger-than-expected operating margins and normalised tax rate, we adjusted our FY26F and FY27F forecasts to reflect these trends. As a result, our CNP estimates rise by +17.4%/+15.0%, respectively.

 

Valuation. We raised the applied P/E multiple for the Services segment to 6.9x (from 5.1x), reflecting encouraging progress across its key projects. These adjustments lift our SOP-derived target price to RM0.50 (from RM0.35), supported by a three-star ESG rating. Consequently, we upgrade recommendation to BUY (from HOLD). Further upside will depend on enhanced execution visibility across key projects and a sustained recovery in operating cash flow.

 

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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