The strong recovery in Hong Leong Asia’s building materials (BMU) segment cushioned the trading and manufacturing company’s results in 1HFY2022 ended June, say CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan.
Profit before tax from the BMU segment surged 141% y-o-y to $33.6 million. This was helped by improving construction activities in Singapore as a result of relaxation of border restrictions, which led to an inflow of migrant workers, write the analysts.
This is compared to Hong Leong Asia’s 1HFY2022 core Patmi of $32.1 million, up 36% h-o-h and 6% y-o-y. Hong Leong Asia’s 1HFY2022 core Patmi excludes a $10.6 million gain from asset disposal.
The figures are in line with CGS-CIMB’s forecasts at 50% of its FY2022 estimates.
In an Aug 23 note, Ong and Tan are maintaining “add” on Hong Leong Asia with a raised target price of $1.05 from $1.00 previously. The new target price represents a 42.9% upside.
The “stronger-than-expected” performance of BMU segment offset the diesel engines segment’s weakness, say Ong and Tan.
See also: Hong Leong Asia sees 1HFY2022 earnings increase by 4.5% y-o-y to $42.6 mil
Singapore’s Ministry of Trade and Industry (MTI) pointed out the value-add of the sector remained 24% below pre-pandemic levels in 2Q2022, with pace of recovery partly dampened by increased workplace incidents and increased number of stop work orders at construction sites due to an increase in reported dengue and Covid-19 cases.
“We view these as transient issues which should be alleviated in the upcoming quarters, and forecast segment profit before tax (PBT) of $35.7 million, up 93% y-o-y, with further recovery in construction activities,” write Ong and Tan.
Meanwhile, engine unit sales fell 37% y-o-y to 181,000 engines in 1HFY2022, off a high base in 1HFY2021, which benefited from strong pre-buying on new engine standard implementation, write Ong and Tan.
That said, the segment improved 6% h-o-h as distributors’ accumulated inventory was better digested.
Sales of off-road engines performed relatively better compared to truck and bus engines, say Ong and Tan. “In view of China’s economic slowdown and disruptions from ongoing Covid-19 restrictions, we think market conditions could remain challenging in 2HFY2022; hence, we lower our segment revenue growth forecast to 5% y-o-y for 2HFY2022.”
They add: “That being said, we believe segment PBT margins should see further sequential improvements with the ramp-up of National VI (N6) engine sales, enabling Yuchai to reach volume commitment needed to negotiate further cost reductions on required parts, and higher sales mix of the off-road segment.”
Ong and Tan see tailwinds from a recovery in Singapore’s construction activities. CGS-CIMB is raising its FY2022-2024 earnings per share forecast by 1.3%-4.2% on stronger BMU volume assumptions.
“Potential catalysts include faster recovery in Singapore’s construction sector or Chinese government’s stimulus measures catalysing diesel engine sales. Downside risks include supply chain disruptions further dampening business sentiment in China,” write Ong and Tan.
As at 10.55am, shares in Hong Leong Asia are trading flat at 73.5 cents, down 13.5% year-to-date.
