PETALING JAYA: HSS Engineers Bhd
’s earnings are expected to pick up in the second half of 2024 (2H24) when its Baghdad metro project in Iraq kicks off, says CGS International (CGSI) Research.
HSS Engineers’ core net profit in the second quarter of 2024 (2Q24) dropped by 57% year-on-year (y-o-y) to RM2.8mil, bringing 1H24 core net profit to RM7.7mil which saw a 30% decline y-o-y.
CGSI Research said this was in line with expectations at 22% and 23% of its and Bloomberg consensus’ financial year 2024 (FY24) forecasts.
“The key highlight for 2Q24 was an 11% y-o-y decline in project management consultancy (PMC) revenue to RM19mil.
“This was due to the decline in recognition for its mass rail transit (MRT) three PMC, but offset by other PMC projects, such as Pan Borneo Sabah phase 1A (77.4% completion as of June 24) and its role as project delivery manager in the Northern Corridor Economic Region,” the research house said in a report yesterday.
The group’s gross profit margin stood at 30% in 2Q24 compared with 1Q24’s 32% and 2Q23’s 33%. HSS Engineers gross profit margin has been in the 30% to 37% range for the past nine quarters, and at 22% to 29% in 1Q20 to 4Q21.
On July 1, HSS Engineers and its joint venture partner, Consultant HSS, LLC entered into a contract with the Mayoralty of Baghdad for the provision of PMC and construction supervision services (CSS) for a metro project in the Iraqi capital.
The total estimated fees are RM1.49bil, of which HSS Engineers’ 50% share is worth RM745mil.
Of the amount, RM249mil (0.6% of construction cost of RM83bil) related to the PMC work that commenced in July and ends in 3Q25.
Thereafter, the CSS contract worth RM497mil (1.2% of construction cost of RM83bil) will commence in 3Q25 and end in May 2029.
“We believe the litmus test for its Baghdad metro project is the receipt of advance payment of RM37mil (HSS Engineers’ 50% share), which is expected by September.
“The Baghdad metro project brings HSS Engineers’ year-to-date contract wins to about RM880mil and order book to RM2.1bil as of June.
“Depending on timing and the ability to execute, there could be upside to the gross profit margins for this contract, where the estimated gross profit margin guidance for this new project of 40% is superior to the group gross profit margin of 32% as of 1Q24, given better rates internationally and its lower domestic cost,” the research house said.
The research house pointed out that country-specific risks with overseas contracts would be mitigated by the advance payment to be received and the end-client, which is the government of Iraq.
“Additionally, we believe this is an important win for HSS Engineers to diversify its order book away from the MRT 3 PMC and could open the doors to more overseas projects, making HSS Engineers less susceptible to delays in contract flows in Malaysia,” the research house said.
