CGS International's analysts Ong Khang Chuen and Kenneth Tan have kept their "add" call and $1 target price on Hong Leong Asia H22 , calling the company an "underappreciated building materials proxy" for the construction industry upcycle in Singapore and Malaysia.
In 2HFY2023, its building materials unit enjoyed strong growth momentum with earnings up 167% y-o-y to $45 million, thanks to better selling prices and volumes at this Malaysia cement unit Tasek.
The resumption of construction tempo following the end of an enforced safety brake between Sept 2022 and last May in Singapore helped lift demand too.
The government has projected total construction demand this year to be between $32 billion and $38 million, versus $33.8 billion recorded last year - the highest level since 2014.
There's clear growth visibility in Singapore with 2025 and 2028 forecast at between $31 and $38 billion per year, versus the average of $29.8 billion between 2009 and 2023.
The medium-term outlook in Malaysia is positive too, with the likely rollout of key mega projects such as MRT 3, Bayan Lepas LRT and potentially HSR.
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In their March 18 note, Ong and Tan are projecting the building materials unit to enjoy PAT growth of 10% in the current FY2024, with Malaysia’s cement average selling prices on an upswing and Singapore’s higher precast demand on regulatory tailwinds.
In addition, HLA's separately listed China-based engine-making subsidiary Yuchai is expected to recover from multi-year lows from the impact of the pandemic.
This year, with inventory destocking post new engine standard implementation, Yuchai is seen to enjoy growth in the sale of natural gas engines and export sales.
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Ong and Tan believe Hong Leong Asia is poised to enjoy a re-rating thanks to stronger profitability improvement of building materials unit riding on strong demand growth.
Potential corporate actions, which the analysts did not specify, are seen to help unlock value for shareholders too.
Downside risks, meanwhile, include delays in the award of key infrastructure projects in Malaysia, or intensified pricing competition.
Excluding HLA’s stake in listed subsidiaries/associates, Hong Leong Asia's implied valuation of its building materials unit - which accounted for 80% of its FY23 PATMI before corporate costs - is only at $150 million, or 2.5x 12M-trailing P/E, based on latest market value.
They are projecting HLA to grow its PATMI by another 15% this year on stronger construction activity levels and volume recovery of Yuchai.
As at 10.04am, HLA shares changed hands at 61 cents, up 0.83%.
