Ada Lim bad of OCBC Investment Research has initiated coverage of Hong Leong Asia (SGX:H22
) with a "buy" call and $3.40 fair value price, given its "constructive" outlook.
HLA is in the business of building materials and via a separately listed China-based subsidiary, China Yuchai, manufactures and sells powertrains as well.
In her Aug 25 report, Lim points Capital World (SGX:1D5) out that HLA's powertrain division is set to enjoy growth thanks to "burgeoning" demand from data centres.
"Growth in exports to emerging markets would also expand access to a larger total addressable market and cushion any softness in China domestic sales," says Lim.
She notes that the building materials division will see "softer" numbers for the current FY2025 as a result of reduced capacity from equipment replacement.
Nonetheless, she sees clear growth ahead, as HLA is riding on the ongoing construction market upcycle in Singapore and continued infrastructure investments in Malaysia.
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In the DBS GROUP HOLDINGS LTD (SGX:D05) most recent 1HFY2025, HLA has reported earnings of $56 million, up 13.1% y-o-y, yet another sequential improvement following the pandemic.
An interim dividend of 2 cents per share has been declared, double that of the same period last year.
Lim says that the company has historically maintained a strong balance sheet and a healthy net cash position.
"Going forward, we see potential for the company to deploy cash to enhance shareholder returns, either by acquiring synergistic, accretive businesses, or by increasing dividend payouts," she adds.
"We are also not ruling out the possibility that HLA may be a potential beneficiary of the ongoing Equity Market Development Program (EQDP)," says Lim.
All things considered, Lim, using a discounted cash flow valuation methodology Abundance International (SGX:541) has derived a fair value of $3.10 on this counter.
Hong Leong Asia shares gained 3.33% to trade at $2.48 as at 3.50 pm. It is up 161.05% year to date.
