CGS International’s Ong Khang Chuen and Kenneth Tan have kept their “add” call on Hong Leong Asia H22 at a raised target price of $1.20 from $1.00 previously as they believe the group is an underappreciated proxy for the construction industry upcycle in Singapore and Malaysia.
The analysts note that Hong Leong Asia’s 1HFY2024 ended June profit after tax and minority interests (patmi) of $50 million formed 66% of their full-year forecasts, beating expectations.
The group also resumed an interim dividend per share (DPS) of 1 cent for the period.
“Both core segments performed strongly in 1HFY2024, with y-o-y profit after tax (pat) growth of 29% at its powertrain solutions segment and 35% at building materials segment,” write Ong and Tan.
Hong Leong Asia’s subsidiary, Yuchai, recorded strong unit engine sales growth of 16% y-o-y in the period, outpacing the industry’s growth of 4% y-o-y due to improved product price competitiveness, new gas engine model launches and stronger export sales.
Ong and Tan also see the policy launched in July by China’s National Development and Reform Commission (NDRC) as a driving factor for Yuchai.
The stimulus programme encourages the scrapping of older commercial vehicles and equipment in favour of newer, more environmentally-friendly models, with rebates of up to RMB140,000 ($25,571) per truck provided to owners who scrap existing heavy-duty trucks and replace them with new energy trucks.
“We believe the supportive policy backdrop can aid industry prospects in 2HFY2024, though effectiveness could be constrained by the weak economic backdrop in China,” write Ong and Tan.
Meanwhile, Hong Leong Asia’s subsidiary in Malaysia, concrete supplier Tasek, saw higher volumes and selling prices leading to better profitability in the 1HFY2024.
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The analysts write: “Industry outlook remains positive in Malaysia, in our view, driven by rising data centre demand and expectations of more government infrastructure rollouts for the Penang LRT, Johor autonomous rapid transit (ART), and potentially the Kuala Lumpur-Singapore high-speed rail.”
They add that operations in Singapore also improved on the back of a strong order book and cessation of the heightened safety alert.
“While Hong Leong Asia’s prefabrication business faced some slowdown in 1HFY2024, we expect a better showing in 2HFY2024 as [its] orderbook grows.”
The analysts’ raised target price comes from improving prospects across Hong Leong Asia’s key business segments, a 6.7% to 8.4% raise in FY2024 to FY2026 earnings per share (EPS) and lastly, its higher stake in Yuchai. They have raised their EPS estimates for FY2024 to FY2026 by 6.7% to 8.4% on higher sales volume assumptions from Yuchai and the company's higher stake in Yuchai.
Re-rating catalysts noted by Ong and Tan include stronger Yuchai sales volumes or corporate actions to unlock value, while downside risks include slower economic recovery in China dampening Yuchai’s volume growth, or delays in the award of key infrastructure projects in Malaysia.
As at 10.14 am, shares in Hong Leong Asia are trading flat at 79.5 cents.
