<Results First Take> Rising R&D costs crimp margins
- FY21 revenue beats expectations at $4.9bn but PATMI of S$60.1m disappoints on lower margins
- Higher R&D spend dents Diesel Engines EBIT margins even as Building Materials picks up pace
- Diesel engines segment may be set to enter investment phase with elevated R&D spending in the medium-term
- We currently have a BUY call with TP of S$1.02
| S$m | 2H21 | 2H20 | y-o-y change | 1H21 | h-o-h change |
| Revenue | 2,093.8 | 2,359.1 | -11.2% | 2,838.7 | -26.2% |
| Operating Income | 40.9 | 109.8 | -62.8% | 111.4 | -63.3% |
| PATMI | 19.4 | 27.4 | -29.1% | 40.7 | -52.4% |
| Segment Revenue | |||||
| Diesel Engines | 1,827.9 | 2,131.0 | -14.2% | 2,601.0 | -29.7% |
| Building Materials | 248.2 | 210.7 | 17.8% | 222.9 | 11.4% |
| Rigid Packaging | 15.9 | 14.1 | 13.1% | 14.3 | 11.7% |
| Segment PAT | |||||
| Diesel Engines | 11.3 | 69.2 | -83.7% | 74.4 | -84.8% |
| Building Materials | 17.5 | 13.3 | 31.9% | 10.7 | 64.1% |
| Rigid Packaging | -0.6 | -0.4 | 58.9% | -0.4 | 54.3% |
What’s New
FY21 revenue beats expectations but PATMI disappoints on lower margins
- FY21 revenue grew 9.7% y-o-y to S$4.9bn, exceeding our forecasts by 5%
- However, FY21 PATMI formed only 81% of our full year forecasts at S$60.1m
- Notably, 2H21 revenue and PATMI declined steeply h-o-h as pre-buying for diesel engines (in preparation for regulatory changes) tapered off
- While diesel engine unit sales were in line at 456,791 (457,849 forecasted), research and development spending came in much higher than expected, denting Diesel Engine segment EBIT margins to 2.5% (FY20: 4.8%)
- A bright spot was HLA’s Building Materials segment, where EBIT grew 53.3% y-o-y to $24.5m in FY21, exceeding our forecasts by 6%
Our View
Diesel Engines division enters investment phase; Future HLA growth to be driven by Building Materials division. While we had expected HLA to ramp up spending in R&D for the Diesel Engines segment, the aggressive 72% h-o-h increase in R&D spend came as a surprise. We think this could indicate that HLA is entering an investment phase where it focuses on building up knowledge in key New Energy products such as hydrogen powered engines. Margins for the Diesel Engines could hence stay low for a while. Still, HLA’s Building Materials segment is recovering as the construction sector in Singapore and Malaysia picks up pace. We believe this segment could be HLA’s main driver of growth over the next few years.
We currently have a BUY call with a TP of S$1.02. More updates after the briefing tomorrow.