HSS Engineering

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Quarterly Report For The Financial Period Ended 30 September 2018

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Unaudited Condensed Consolidated Statement Of Profit Or Loss And Other Comprehensive Income For The Third Quarter Ended 30 September 2018



Unaudited Condensed Consolidated Statement Of Financial Position As At 30 September 2018

Review of Performance

For the current quarter and current period to date under review, the Group recorded revenue of RM53.8 million and RM142.9 million respectively.

  1. Analysis of our revenue by activities is as follows:-


  2. Engineering design

    Engineering design revenue increased substantially by RM3.8 million and RM18.6 million for the current quarter and current period ended 30 September 2018 respectively as compared to the corresponding quarter and period in previous year. This is attributable to the major on-going projects which includes Proposed Tun Razak Exchange (TRX) External Roads and West Coast Expressway and design services rendered for East Coast Rail Line (“ECRL”) detailed design and preliminary design up to the date of suspension notice, have contributed to the major proportion of engineering design revenue. However, this was compensated by the completion or work progress of few projects including ECRL scheme design, Temporary Common Camp Facilities and Infrastructure for Refinery and Petrochemicals Integrated Development (“RAPID”) Project and External Infrastructure Works for BBCC.

    In addition, our newly acquired subsidiary, SMHB Engineering Sdn Bhd who started to contribute revenue to our Group post acquisition has led to an increase in engineering design revenue by RM13.3 million.

    Construction supervision

    Our major on-going supervision projects including Maju Expressway Extension To KLIA, Sungei Besi-Ulu Kelang Elevated Expressway and West Coast Expressway which are progressing well in line with the construction stage of these projects continued to contribute majority of the supervision revenue during current period and quarter ended 30 September 2018. However, this was offsetted by completed project, i.e. LRT Ampang Line Extension and Kuantan Port Expansion in line with their completion status.

    In addition, our newly acquired subsidiary, SMHB Engineering Sdn Bhd who started to contribute revenue to our Group post acquisition has led to a substantial increase in construction supervision revenue by RM26.4 million.

    Project management

    The revenue from project management for both current period and quarter decreased as compared to the same corresponding periods in previous year. This is in line with the progress of the on-going project management projects which include MRT Line 2 –Jajaran Sg. Buloh-Serdang-Putrajaya and MRT Line 1- Jajaran Sg. Buloh-Kajang. However, this is offset by new project Taman Perling Mixed Used Development which is progressing as per schedule.

    BIM services

    BIM services accounted for small proportion of the Group’s revenue. The reduction in revenue for both current period and quarter was mainly due to the completion of certain BIM projects.

    Reimbursable income

    Reimbursable income is recognised on a back to back basis with sub-consultant and allowances claimed by supervision staff and therefore it has no significant impact on the financial performance of the Group regardless of the decline or rise in reimbursable income.



  3. Analysis of our revenue by geographical locations is as follows:-


  4. Local market continued to contribute significant portion of revenue amounting to 98.0% of the Group’s total revenue. The higher revenue posted by Malaysia segment was attributed to local projects explained in section (a) above.

  5. Profit after tax ("PAT")

  6. 3 months ended 30 September 2018
    PAT for current quarter ended 30 September 2018 grew substantially by RM6.30 million or 221.4% is mainly attributable to newly acquired subsidiary, i.e. SMHB Engineering Sdn Bhd who contributed RM4.77 million in current quarter post acquisition apart from higher PAT contributed by existing subsidiary, HSS Engineering Sdn Bhd. However, this is compensated by higher interest expense by RM1.67 million mainly arising from the term loan of RM85 million to part finance the acquisition of SMHB Engineering Sdn Bhd.

    9 months ended 30 September 2018
    PAT for current period ended 30 September 2018 increased by RM7.95 million or 88.6% is mainly attributable to newly acquired subsidiary, i.e. SMHB Engineering Sdn Bhd who contributed RM8.13 million in current period post acquisition apart from higher PAT contributed by existing subsidiary, HSS Engineering Sdn Bhd. However, this is compensated by higher interest expense by RM3.41 million mainly arising from the term loan of RM85 million to part finance the acquisition of SMHB Engineering Sdn Bhd and one-off expenses totalling RM2.58 million incurred for our multiple corporate exercises for the acquisition of SMHB Engineering Sdn Bhd which were completed in March 2018.

  7. Our unbilled order book which includes order book from SMHB Engineering Sdn Bhd as at 30 September 2018 is as follows:

  8. The above unbilled order book will be billed progressively on average over the next two (2) to five (5) years.

Prospects

  1. Prospects in the Water Infrastructure Sector

    The newly formed Ministry of Water, Land and Natural Resources (KATS) is reviewing the National Water Policy which will see some new reforms in the water sector for Malaysia. The integration of water, land and natural resources under one ministry can be expected to result in better planning and management of the water infrastructure (including sewerage infrastructure) in the country, especially in bridging the gap between State and Federal jurisdictions.

    In the post national budget forum held on 12th November 2018, newly formed Ministry of Water, Land and Natural Resources (KATS) has indicated that there is an allocation of about RM690 million for the year 2019 in funds for the water sector under the recent National budget for implementation of projects for water assets and for reducing Non-Revenue Water (NRW). In addition to that, it is understood that there are also available funds for capital works under Pengurusan Asset Air Berhad or PAAB who is the national water asset owner under the Ministry of Finance. Furthermore, with the consolidation of water assets in now 7 out of 11 states in Peninsular Malaysia, PAAB should be able to increase their revenue from the leasing arrangements with the states for the acquired assets. The allocated budget from the Federal Government as well as PAAB’s funds will be channelled towards more capital works in the water sector which will include source works, water treatment plants, water distribution pipelines, and also towards reducing NRW.

    For the sewerage sector, the allocated budget is RM590 million for the year 2019. The Government is also looking at improving their collection which should see more funds available for capital works to build more municipal treatment plants and sewerage network systems to connect households that are still utilising septic tanks and other traditional systems.

    SMHB Engineering Group, being a key player and having been in the water industry in Malaysia for more than 55 years, is well positioned to jump on board the bandwagon when the water and sewerage infrastructure projects are announced. In fact, SMHB is already taking strides to participate in the recent tenders that have been released, particularly in Sarawak and Sabah where water shortage is a state concern.


  2. Status of East Coast Rail Link (‘’ECRL’’) Pending Government’s Review

    Given the high national debt level, we are supportive of the government’s efforts in reducing the debt level which includes the review of mega projects like ECRL. On 9 July 2018, we have made announcements on the suspension of services for both detail design and supervising consultancy services for infrastructure work for one of the packages in ECRL.

    There was no significant impact on the operations and financials of the Company up to the date of suspension in the current financial period as all completed works shall be compensated for in accordance with the terms and conditions of the contracts.

    Upon completion of the Government’s review, there will be clearer visibility upon receipt of direction from the client for us to assess the financial impact, if any. In the event the suspension of the contracts is lifted, it is expected for both contracts to contribute positively to the revenue and earnings of the Group.


  3. Future Plans
    The Group has put in place a series of future plans as follows:-
    1. Continuous enhancement on its Building Information Modeling (“BIM”) services which will be made mandatory in 2020 onwards for public projects worth RM100 million in Malaysia;
    2. Proposed venture into a fourth (4th) core service i.e. facility management to develop a steady long term income business model;
    3. Geographical expansion into ASEAN and India regions; and
    4. Venturing into the provision of support services to the power generation sector which is expected to receive strong government support.

Premised on the aforesaid plans (i) and (iii), the Group expects reasonable performance in the financial year 2018 given the existing unbilled order book balance of RM588.6 million which will provide visibility in earnings for the next 2-3 years.

Despite of the current business environment and barring any unforeseen circumstances, the Board of Directors of the Company is of the opinion that the prospects for the remaining period to the end of the financial year ending 31 December 2018 will remain challenging.