HEB reported a 1QFY26 Core Net Profit (CNP) of RM3.7m, declining -29.0% YoY and -60.2% QoQ. We deem the results below expectations, accounting for only 13.0% of our full-year forecast and 13.5% of consensus estimates.
Excluding certain projects with limited progress, the Group’s effective unbilled order book declines to an estimated RM550m, equivalent to only 2.3x our FY26 forecasted revenue, suggesting weaker earnings visibility moving forward.
Consequently, we lower our FY26F/FY27F CNP estimates by -28.5% and -24.0%, respectively, reflecting lower revenue recognition from its Baghdad Metro project and weaker operational leverage.
Maintain BUY recommendation with a lower TP of RM0.48 (from RM0.50), based on SOP valuation, supported by a three-star ESG rating.
Results below expectations. HEB reported a 1QFY26 Core Net Profit (CNP) of RM3.7m, declining -29.0% YoY and -60.2% QoQ. We deem the results below expectations, accounting for only 13.0% of our full-year forecast and 13.5% of consensus estimates. The weaker-than-expected performance was mainly attributable to slower project progress and higher-than-anticipated tax expenses, which led to a notable compression in CNP margins (-210bps YoY; -613bps QoQ).
YoY. HEB’s CNP declined -29.0% YoY, mainly due to a 210bps contraction in CNP margin to 8.1%. The weaker profitability was primarily attributable to the +94.9% increase in income tax expense, arising from losses incurred by subsidiaries and recurring non-deductible expenses. Earnings were further impacted by lower revenue contributions across all operating segments, with the Engineering Design division recording the steepest decline, as revenue fell RM2.5m to RM11.7m following the completion of a data centre project in Cyberjaya.
QoQ. All business segments recorded weaker revenue recognition during the quarter, led by the Project Management division, which registered a -34.6% QoQ decline due to the absence of revenue contribution from the Baghdad Metro project. Consequently, the Group’s revenue fell -30.2% QoQ to RM46.0m, while CNP declined at a steeper pace of 60.2%, reflecting the negative operating leverage arising from lower project activity.
Weakening Cash Position. We note that the Group has increased its reliance on short-term financing to support working capital requirements during the quarter, as reflected by the higher utilisation of secured bank overdrafts. Meanwhile, the increase in pledged deposits suggests additional collateral was placed to support these banking facilities. While this points to a more leveraged working capital position, continued reliance on short-term financing could place pressure on liquidity if operating cash flow and receivables collection do not improve accordingly.
Outlook. While the Group’s headline order book of RM2.1bn remains sizeable, we remain cautious on its near-term outlook given the limited progress of the Baghdad Metro and MRT3 projects, which collectively account for an estimated RM1.6bn in unbilled orders. Excluding these projects, the Group’s effective unbilled order book declines to approximately RM550m, equivalent to only 2.3x our FY26 forecasted revenue, suggesting weaker earnings visibility moving forward.
In addition, cash flow concerns continue to persist as trade and other receivables rose RM31.2m QoQ to RM95.5m during the quarter, resulting in the Group recording a net operating cash outflow of RM0.25m compared to a net operating cash inflow of RM10.2m previously. Coupled with an inconsistent project replenishment trend and uncertain timing of receivables collection, we believe operational and cash flow visibility remains limited over the near term.
Earnings Revision. We take this opportunity to revise downward our revenue estimates, premised on slower-than-expected progress of the Group’s Baghdad Metro project, while also imputing lower margin assumptions due to weaker operational leverage. Consequently, our FY26F/FY27F CNP estimates are reduced by -28.5% and -24.0%, respectively.
Valuation and Recommendation. We maintain our BUY recommendation on HEB with a reduced TP of RM0.48 (from RM0.50), based on our SOP valuation, supported by a three-star ESG rating. On its Services segment, we apply an unchanged 6.9x PE to rolled forward FY27F EPS of 5.4 sen. A re-rating is contingent on improved execution visibility on its major projects and a sustained recovery in operating cash flow.
Risk. Delays in project execution & delivery, foreign project exposure leading to geopolitical risks and lower-than-expected order book replenishment.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 3.953306 | 3.984027 |
| EUR | 4.594538 | 4.602818 |
| CNY | 0.582675 | 0.583138 |
| HKD | 0.504615 | 0.508560 |
| SGD | 3.085501 | 3.109763 |