SINGAPORE (July 4): PhillipCapital has initiated coverage for Hock Lian Seng Holdings with a “reduce” recommendation and a target price of 31 cents.

Hock Lian Seng (HLS), the civil engineering and property development company, is likely to face challenges in its operating performance, despite forecasts that public sector construction demand in 2016 will be at its highest in 14 years, according to PhillipCapital research analyst Peter Ng.

The group currently faces increasing competition in public project tenders, due to the falling construction demand in the private sector. Coupled with higher labour and construction material costs, the group is expected to see compressed margins moving forward.

Ng added that the slowdown in the Singapore real estate market will also weigh down on HLS’s property development business. HLS’s FY2016 earnings are expected to be lowest in three years on the back of the absence of revenue contribution from property development and a muted property investment segment.

Weakened industrial property demand arising from oversupply and rising vacancies in the segment, will make it more difficult for take up rates to be high at the group’s new industrial property project, Shine@Tuas South. Revenue recognition will also only occur after the property is completed in 2018, and is “unlikely to fetch an attractive average selling price due to keen competition within the vicinity as well as the lower land tender prices since Nov 2015”, writes Ng in a note.

In the residential property segment, HLS’s 50% joint venture residential development project, The Skywoods, was 99.5% sold as at May 2016, and a large proportion of its development profits have already been booked.

Furthermore, the group’s main investment property, a worker’s dormitory, had ceased operations after its lease expired in Nov 2015. As such, Ng expects minimal revenue contribution from the group’s investment property segment until another investment property is purchased and begins operations.

PhillipCapital has forecast dividend payments to fall in the next three years on the back of declining earnings until the completion of its industrial property in 2018.

HLS’s shares were trading at 34.5 cents at 2.36pm on July 4.