Brokers' take: UOBKH starts coverage on Hong Leong Asia with S$1.38 target price

UOB Kay Hian (UOBKH) has initiated "buy" on Hong Leong Asia (HLA), the trade and industry arm of Singapore conglomerate Hong Leong Group, with a target price of S$1.38.

Based on the brokerage's estimates, this is pegged to 12 times FY2022 price-to-earnings (P/E), or one standard deviation above the stock's historical five-year average.

"We think the current valuation of nine times FY2022 P/E for HLA is attractive, given the cyclical upturn for the commercial vehicles industry in China on the back of greater buying of National VI(a) compliant diesel engines before the full implementation on July 1, 2021," noted analyst John Cheong in a Thursday report.

The analyst is positive on the demand prospects for HLA's diesel engine business China Yuchai International, which he highlights as the second-largest engine manufacturer in China and expects to report a 17 per cent year-on-year growth in earnings in FY2021.

"To tap 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 noted, adding that this is likely to drive long-term growth for the group.

Mr Cheong also reckons HLA's building materials segment will benefit from a strong recovery this year, driven by better sales volume as well as better average selling prices for precast and ready-mix concretes as construction activity resumes.

He projects this segment to clock in year-on-year revenue and earnings growth of 30 per cent and 55 per cent respectively for FY2020, and believes it serves as a "good proxy for the recovery of Singapore's construction activity".

Given the strong growth projections for both HLA's building materials and diesel engines segments, Mr Cheong is anticipating the group's FY2021 earnings to grow 52 per cent year on year.

"(HLA's) disposal of the loss-making air-conditioning business, which is expected to complete in H1 FY2021, will also provide a further earnings lift and allow management to concentrate on the profitable segments," he added.

HLA shares ended Thursday up S$0.03 or 2.9 per cent at S$1.05.