Brokers’ take: CGS-CIMB raises target on Hong Leong Asia in anticipation of construction recovery

CGS-CIMB on Wednesday (Aug 24) raised its target price on Hong Leong group’s trade and industry arm, Hong Leong Asia, in anticipation of better prospects amid a construction recovery in Singapore, which will offest weaknesses in its diesel engine segment.

The brokerage reiterated an “add” call on the group, with a target price of S$1.05 — which represents an upside of 42.9 per cent against the counter’s trading price of S$0.735 as at the midday trading break on Wednesday.

Analysts from CGS-CIMB noted that Hong Leong Asia’s H1 core profit after taxation and minority interests (Patmi) of S$32.1 million, which excludes the S$10.6 million gain from asset disposal, was in line with expectations at 50 per cent of their FY2022 forecast.

Given also that the group’s building materials segment profit before tax surged 141 per cent year on year to S$33.6 million in the first half of 2022, the analysts forecasted the segment to generate profit before tax to be S$35.7 million in the second half of the year — a 93 per cent gain year on year as construction activities continue to recover.

This, they believe, will offset the slower growth in its diesel engine segment, which will likely be bugged by China’s economic slowdown and disruptions from ongoing Covid-19 restrictions.

CGS-CIMB thus raised its FY2022 to FY2024 earnings per share targets by 1.3 per cent to 4.2 per cent on stronger building materials volume assumptions.

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The brokerage further sees potential catalysts in a faster recovery in Singapore’s construction sector, or from the Chinese government’s stimulus measures catalysing diesel engine sales.

Downside risks on the other hand, include supply chain disruptions further dampening business sentiment in China.