KUALA LUMPUR: Kenanga research has downgraded Hock Seng Lee Bhd (HSL) to underperform as it believes the recent rally in share price was mainly sentiment-driven given that major infrastructure project tenders are still in the early stages.
"Amidst intensifying competition, we prefer to wait for more concrete developments and hence, believe our downgrade is fair," it said in a research note on Tuesday.
Kenanga maintained HSL's target price of RM1.30 based on 10x FY19E PER, which is close to its five-year -1.5SD levels at the higher end of the ascribed 6-11x PER valuation range of small-mid cap contractors.
The research house said HSL's recently announced contract wins for a coal-fired power plant project in Mukah, Sarawak, with a combined value of RM54.3mil from Sarawak Energy Bhd falls within its FY19E replenishment target of RM400mil.
Assuming a pre-tax margin of 14%, Kenanga expects the project to contribute about RM5.7mil to the bottomline.
Year to date, HSL's job replenishment has amounted to RM81.3mil, which is 20% of its FY19E target.
Kenanga added that HSL's construction work for its existing projects like Pan Borneo, Miri and Kuching Waste Water is progressing smoothly at about 40% and 30% progress.
The group's current outstanding order book stands at about RM2.5bil, which provides three-year visibility.
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