Goldman Sachs is bullish on construction giant Leighton Holdings, citing reduction in balance sheet gearing and improved project margins.

Goldman Sachs has upgraded its recommendation on Leighton Holdings (LEI) to buy from neutral and has raised its target price by 27.5 per cent to $25.50.

The broker is encouraged by continuing signs that Leighton is turning the corner on a number of issues that have negatively impacted the company in recent times. It still sees the possibility of execution risks and impairments but believes the equation is now more favourably balanced and current prices reflect these uncertainties.

On its current forecasts, Goldman sees Leighton’s trading at a full-year 2014 estimated price-earnings ratio of 12.6 times versus the full-year 2014 ASX 200 Industrials P/E of 15.3 times. This represents a discount of 18 per cent versus a historical average discount of around 5 per cent. Hence, it sees considerable valuation support for the stock.

"We think that near-term catalysts to further drive the re-rating of the stock will likely include, one, divestment of telco infrastructure assets in the first half of 2013, two, further reduction in balance sheet gearing, three, positive progress updates on the recoverability of Middle East receivables, four, demonstrated improvement in project margins following the completion of problematic legacy contracts and, five, a return to growth in calendar year 2014," Goldman said in its research note.

Source: Iress

From a technical analysis perspective, the five-year chart above is beginning to look very encouraging. The stock has decisively broken up through its long term downtrend line which indicates the momentum has now swung to the upside. It's also encouraging to see volume increasing in the most recent rally as it shows an increase in rally participation.

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