Revving up for a stronger ride in 2022
? 2H21 core PATMI of S$19.3m (-22% yoy) was in line. Yuchai saw weaker sales post pre-buying ahead of Jul’s new engine standard implementation.
? We forecast building materials unit to record 27% PBT growth in FY22F on the back of recovery in construction activity in Singapore.
? Yuchai should also see sequential volume and margin recovery in coming quarters as industry sales gradually normalise. Maintain Add.
2H21: A weaker-than-expected half
HLA reported 2H21 core PATMI of S$19.3m (-37% hoh, -22% yoy), dragged by weaker diesel engines unit (Yuchai) which saw sales decline after benefiting from strong prebuying in 1H21 as China transitioned to National VI (N6) engines on 1 Jul 2021. FY21 core net profit (excluding S$10m gain on debt assignment in 1H21) of S$50m (+10% yoy) was in line with our expectations at 99% of our full-year forecast. The group proposed full year DPS of 2 Scts (vs. FY20: 1 Sct), indicating 2.5% dividend yield.
Riding the construction rebound in Singapore
Building materials unit (BMU) recorded 2H21 PBT of S$19m (+19% yoy), supported by rising demand for concrete products in Singapore as construction activity recovers. The Building and Construction Authority (BCA) expects further demand recovery for building materials in Singapore in CY22F, and forecasts industry-ready mixed concrete demand to grow 8-21% and precast concrete demand to grow 45-63%. We forecast HLA’s building materials segment to see PBT growth of 27% yoy in FY22F, riding on 1) stronger sales volume in Singapore, 2) narrower Tasek losses, and 3) higher profit contribution from associate BRC Asia. Commercialisation of HLA’s integrated construction and prefabrication hub (ICPH) in 4Q22F could further boost segment earnings in FY23F.
Sequential recovery ahead for diesel engine unit
Engine unit sales declined 40% hoh to 171k engines in 2H21, mainly dragged by weaker truck engine sales, while engine sales to the bus market and off-road market grew. Management believes that the accumulated distributors’ inventory (ahead of new engine standard implementation) has pared down well in 2H21, and we forecast sales volume to improve sequentially in coming quarters as industry sales normalise. Along with volume recovery, we believe PBT margin for FY22F will also improve given the high operating leverage of the segment.
Reiterate Add with lower TP of S$1.00
Maintain Add; we believe the worst is over for HLA, and expect sequential earnings recovery ahead for both of its key segments. Our FY22-23F EPS is lowered to factor in lower margin assumptions for Yuchai; our SOP-based TP is lowered to S$1.00 accordingly. Potential catalysts include a stronger rebound in demand for diesel engine and faster recovery in Singapore’s construction sector. Downside risks include input price pressure for Yuchai, dragging margin recovery.