Is HSS Engineers Berhad (KLSE:HSSEB) Potentially Undervalued?

HSS Engineers Berhad (KLSE:HSSEB), might not be a large cap stock, but it saw a double-digit share price rise of over 10% in the past couple of months on the KLSE. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Let’s examine HSS Engineers Berhad’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

View our latest analysis for HSS Engineers Berhad

What's The Opportunity In HSS Engineers Berhad?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 16.23x is currently trading slightly below its industry peers’ ratio of 16.96x, which means if you buy HSS Engineers Berhad today, you’d be paying a decent price for it. And if you believe HSS Engineers Berhad should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. So, is there another chance to buy low in the future? Given that HSS Engineers Berhad’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

What does the future of HSS Engineers Berhad look like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With profit expected to grow by 93% over the next couple of years, the future seems bright for HSS Engineers Berhad. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What This Means For You

Are you a shareholder? HSSEB’s optimistic future growth appears to have been factored into the current share price, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at HSSEB? Will you have enough conviction to buy should the price fluctuate below the industry PE ratio?

Are you a potential investor? If you’ve been keeping an eye on HSSEB, now may not be the most optimal time to buy, given it is trading around industry price multiples. However, the positive outlook is encouraging for HSSEB, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

So while earnings quality is important, it's equally important to consider the risks facing HSS Engineers Berhad at this point in time. While conducting our analysis, we found that HSS Engineers Berhad has 1 warning sign and it would be unwise to ignore this.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.