“On an ex-cash basis, it trades at a mid-single-digit forward P/E, which appears undemanding relative to consensus growth expectations. As earnings improve and capital returns become clearer, valuation focus may increasingly shift towards ex-cash metrics,” says Jaiswal.
That said, the analyst believes the company could make better use of its “substantial” net cash position, which stood at around $705 million as at June. The amount provides “downside protection while creating flexibility for enhanced shareholder value generation,” he says.
With the recent increase in interim dividends indicating management’s confidence in the sustainability of its cash flow, Jaiswal opines that the surplus capital could support higher dividends or selective acquisitions, which will reinforce returns through the growth cycle.
Among Hong Leong Asia’s businesses, its powertrain solutions should see earnings momentum, supported by market share gains at China Yuchai. Export growth and emerging demand from data centre power backup generators should also contribute to the segment’s earnings, Jaiswal notes.
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Hong Leong Asia’s building materials business is also positioned for sustained growth in demand for cement and ready-mixed concrete (RMC), underpinned by a multi-year construction upcycle in Singapore. The company also has an indirect exposure to the construction cycle through its 20% stake in BRC Asia.
However, key risks include Hong Leong Asia’s earnings concentration in China Yuchai, which exposes the former to China’s commercial vehicle cycle and evolving emissions regulations. Jaiswal also warns of execution risks for the company’s building materials business, particularly around capacity normalisation, operating costs and contractor financial stress during recovery phases.
Shares in Hong Leong Asia closed 2 cents higher or 0.9% up at $2.24 on Dec 18.
