UOB Kay Hian analyst John Cheong has initiated “buy” on Hong Leong Asia as the company’s building materials and diesel engines segments look set to benefit from a strong recovery in 2021.
On this, Cheong has pegged a target price estimate of $1.38, that’s pegged to 12 times FY2022 price-to-earnings (P/E), which is +1 standard deviation (s.d.) above mean P/E.
Hong Leong Asia is the trade and industry arm of Singapore conglomerate Hong Leong Group. It was listed on the Singapore Exchange (SGX) since 1998 and has a management portfolio of diesel engines, building materials supply chain, rigid plastic packaging, as well as air-conditioning systems.
It has an established track record and strong recovery in its building materials segment, to which Cheong expects earnings for this segment to grow by 55% y-o-y for 2021.
The growth is likely to be driven by better sales volume as well as better average selling prices (ASPs) for precast and ready-mix concretes as construction activity resumes.
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Hong Leong Asia’s building materials segment is one of the largest integrated players in Singapore, providing ready-mix concrete and precast concrete elements for public housing construction. Its subsidiary Tasek is the fourth-largest cement producer in Malaysia.
The company’s diesel engine segment also looks set to experience “robust growth” in 2021 as consumers begin purchasing a new version of engines. Hong Leong Asia’s 44.7%-owned subsidiary, China Yuchai is the second-largest engine manufacturer in China.
China Yuchai manufactures and sells engines for trucks, buses passenger vehicles, industrial equipment and agricultural applications.
Despite the major disruptions due to Covid-19, China Yuchai saw a stellar showing in 2020 with a 14.4% y-o-y increase in the number of engine units to 430,320, as a result of the growth in China’s agriculture segment.
“We expect the earnings of China Yuchai to grow by 17% y-o-y for 2021, as the growth momentum should continue in 2021 from greater buying activity in National VI(a) compliant diesel engines before its full implementation on July 1,” writes Cheong.
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“To tap on the electric vehicle (EV) market in the longer term, China Yuchai is developing alternative new energy solutions in new generation hybrid power, integrated electric bridge and fuel cell system,” he adds.
Given the strong showing in both segments, Cheong estimates a 52% growth in Hong Leong Asia’s earnings per share (EPS) in 2021.
Hong Leong Asia, which closed down its loss-making segments in 2020 – including the disposal of its loss-making air-conditioning business – is expected to see a further lift in its earnings due to the move.
The disposal of the segments will also allow management to concentrate on its profitable segments, says Cheong.
“We think current valuations of 9 times FY2022 P/E for Hong Leong Asia are attractive, given that both its key segments will ride on an industry uptrend,” writes Cheong.
Shares in Hong Leong Asia closed 2 cents lower or 1.9% down at $1.02 on April 28, or 0.8 times UOB Kay Hian’s estimates for the FY2021.
