Brokers' take: CGS-CIMB initiates 'add' on Hong Leong Asia, expects 54% profit growth

CGS-CIMB has initiated "add" on Hong Leong Asia (HLA) with a S$1.18 target price. This comes as the research house forecasts net profit after tax growth of 54 per cent in FY2021 for the group.

As the trade and industry arm of Singapore conglomerate Hong Leong Group, HLA operates under three key business segments - diesel engines, building materials, and rigid plastic packaging.

At its current price, investors are paying for HLA's diesel engine segment while getting its building materials segment for free, CGS-CIMB said.

Shares of HLA closed 10.3 per cent or 8.5 Singapore cents higher at S$0.91 on Wednesday.

CGS-CIMB expects HLA's China diesel engine business to ride on policy tailwinds, with pre-buying ahead of the nationwide implementation of National VI engine standards in July 2021. Profit for the segment is anticipated to see 30.8 per cent year-on-year growth in FY2021.

HLA's diesel engine business is operated by China Yuchai International, which is 44.7 per cent owned. Despite being a market leader in China, China Yuchai is trading at 5.6 times the research team's earnings estimates for the 2022 calendar year, a significant 60 per cent discount to its peers.

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A potential secondary listing of China Yuchai in Hong Kong or China could be a re-rating catalyst for HLA. Assuming the discount versus peers is narrowed to 30 per cent, CGS-CIMB's target price for HLA will rise to S$1.33.

As for HLA's building materials business, CGS-CIMB expects the segment to recover as construction activities resume. The segment's profit before tax is expected to grow by 72 per cent to S$21.9 million in FY2021, according to CGS-CIMB's forecast.