Hong Leong Asia: An Undervalued Gem with a Positive Outlook

Hong Leong Asia (HLA), the industrial arm of Singapore’s Hong Leong Group, stands out as an undervalued prospect poised for substantial growth. With its share price currently at S\$0.83 and a well-supported target price of S\$1.11, representing a 33.9% upside, the company remains a compelling buy. HLA’s portfolio, primarily comprising diesel engines and building materials, is well-positioned to capitalize on the robust demand in these sectors.

Strong Performance in Key Segments

HLA’s building materials segment is anticipated to thrive from 2024 to 2026, benefiting from a strong pipeline of mega infrastructure and Housing Development Board (HDB) projects in Singapore. The diesel engine segment, backed by regulatory tailwinds, is also on the verge of an earnings upcycle, driven by new emission standards and the growing trend of new energy vehicles.

Financial Projections

Projections for the company indicate robust earnings growth from 2024 to 2026, with net profits expected to rise significantly. The company anticipates a net turnover of S\$4,231 million in 2024, increasing to S\$4,709 million by 2026. Earnings before interest, taxes, depreciation, and amortization (EBITDA) are forecasted to grow from S\$278 million in 2024 to S\$344 million in 2026.

Valuation and Recommendation

HLA is valued at S\$1.11 per share based on a sum-of-the-parts (SOTP) analysis, with the building materials and diesel engine segments valued at S\$607 million and S\$896 million, respectively. With a current market cap of approximately S\$620 million, the company is considered undervalued, particularly its diesel engine segment. The recommendation is to maintain a “BUY” stance.

Peer Analysis in Construction Materials and Engine Segments

Construction Material Peers

• BRC Asia: Trading at S\$2.55 with a market cap of US\$521 million, BRC Asia boasts a strong price-to-earnings (PE) ratio of 9.2 for 2023, indicating potential growth opportunities.
• Hume Cement: Priced at RM3.18 with a market cap of US\$520 million, Hume Cement is noted for its high PE ratio of 26.7 in 2023, reflecting robust market expectations.
• Malayan Cement: With shares priced at RM4.82 and a market cap of US\$1,453 million, Malayan Cement has a substantial PE ratio of 39.7 in 2023, showcasing its strong market position.
• Pan-United: At S\$0.55 and a market cap of US\$286 million, Pan-United presents a PE of 11.2, revealing a solid performance in the market.

Engine Peers

• Cummins: With a share price of US\$370.15 and a market cap of US\$50,778 million, Cummins leads the engine peers with a PE of 71.3 in 2023, indicating an established market presence.
• Dongfeng Motor: At HK\$4.19 with a market cap of US\$4,447 million, Dongfeng Motor does not report a PE for 2023, highlighting potential volatility in its market performance.
• Weichai Power: Priced at HK\$11.66 and a market cap of US\$15,788 million, Weichai Power offers a PE of 10.5 in 2023, demonstrating its competitive edge.

The average PE ratios for construction material peers stand at 21.7 for 2023, while engine peers average at 40.9, showcasing the diversity in market performance across these sectors.

Conclusion

Hong Leong Asia, along with its industry peers, presents a dynamic landscape of opportunities and challenges. With a strategic focus on key growth sectors and a robust financial outlook, HLA remains a strong contender in the industrial sector. Investors are advised to consider the positive trajectory of HLA and the comparative analysis of its peers when making investment decisions.