CGS-CIMB Research analyst Ong Khang Chuen has maintained his “add” rating on Hong Leong Asia after the group reported its results for the 2HFY2021 and FY2021 ended December on Feb 25.

In his report dated March 8, Ong has lowered his target price to $1 from $1.05 before.

“We believe the worst is over for Hong Leong Asia, and expect sequential earnings recovery ahead for both of its key segments,” says Ong. “Our FY2022-2023 earnings per share (EPS) is lowered to factor in lower margin assumptions for Yuchai.”

For the 2HFY2021, Hong Leong Asia reported core PATMI of $19.3 million (-37% h-o-h, -22% y-o-y), dragged by weaker diesel engines unit (Yuchai) which saw sales decline after benefiting from strong pre- buying in 1H21 as China transitioned to National VI (N6) engines on July 1, 2021.

“FY2021 core net profit (excluding $10 million gain on debt assignment in 1HFY2021) of $50 million  (+10% y-o-y) was in line with our expectations at 99% of our full-year forecast,” says Ong.

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“The group proposed full year dividend per share (DPS) of 2 cents (vs. FY2020: 1 centt), indicating 2.5% dividend yield,” he adds.

Moreover, Building and Construction Authority (BCA) expects further demand recovery for building materials in Singapore in calendar year (CY) 2022, and forecasts industry-ready mixed concrete demand to grow 8% to 21% and precast concrete demand to grow 45% to 63%.

“We forecast Hong Leong Asia’s building materials segment to see PBT growth of 27% y-o-y in FY2022F, riding on stronger sales volume in Singapore, narrower Tasek losses, and higher profit contribution from associate BRC Asia,” Ong says. “Commercialisation of HLA’s integrated construction and prefabrication hub (ICPH) in 4QFY2022 could further boost segment earnings in FY2023.”

However, engine unit sales declined 40% h-o-h to 171,000 engines in 2HFY2021, mainly dragged by weaker truck engine sales, while engine sales to the bus market and off-road market grew.

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“Management believes that the accumulated distributors’ inventory (ahead of new engine standard implementation) has pared down well in 2HFY2021, and we forecast sales volume to improve sequentially in coming quarters as industry sales normalise,” Ong says.

“Along with volume recovery, we believe PBT margin for FY2022 will also improve given the high operating leverage of the segment,” he adds.

Some catalysts posited by the analyst include a stronger rebound in demand for diesel engine and faster recovery in Singapore’s construction sector. For downside risks, Ong considers input price pressure for Yuchai, dragging margin recovery.

Shares in Hong Leong Asia are trading at 1 cent higher or 1.28% up at 79 cents on March 9.

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