BMU recovery cushions engine weakness
- 1H22 core PATMI of S$32.1m (+36% hoh, +6% yoy) was in line. Building materials segment’s strength offset diesel engines segment’s weakness.
- We expect stronger PATMI in 2H22F, underpinned by tailwinds from a recovery in Singapore’s construction activities.
- Reiterate Add with a slightly higher TP of S$1.05.
1H22: Building materials strength offset diesel engine weakness
HLA’s 1H22 core PATMI (excluding S$10.6m gain from asset disposal) of S$32.1m (+36% hoh, +6% yoy) was in line with our expectations at 50% of our FY22F forecast. Stronger-than-expected performance of building materials segment offset diesel engines segment’s weakness in 1H22.
Building materials: Strong recovery in 1H22; more to come
Building materials (BMU) segment PBT surged 141% yoy to S$33.6m in 1H22, helped by improving construction activities in Singapore as a result of relaxation of border restrictions which led to an inflow of migrant workers. That said, the Singapore Ministry of Trade and Industry (MTI) pointed out the value-add of the sector remained 24% below pre-pandemic levels in 2QCY22, with pace of recovery partly dampened by 1) increased workplace incidents (and lower productivity) given time needed to train the newly replenished workforce, and 2) increased number of stop work orders at construction sites due to an increase in reported dengue and Covid-19 cases. We view these as transient issues which should be alleviated in the upcoming quarters, and forecast segment PBT of S$35.7m (+93% yoy) in 2H22F with further recovery in construction activities.
Diesel engines (Yuchai): Pushing back recovery expectations
Engine unit sales fell 37% yoy to 181k engines in 1H22 (off a high base in 1H21 which benefited from strong pre-buying on new engine standard implementation), but improved 6% hoh as distributors’ accumulated inventory was better digested. Sales of off-road engines performed relatively better compared to truck and bus engines. In view of China’s economic slowdown and disruptions from ongoing Covid-19 restrictions, we think market conditions could remain challenging in 2H22F; hence, we lower our segment revenue growth forecast to 5% yoy for 2H22F. That being said, we believe segment PBT margins should see further sequential improvements with 1) ramp-up of National VI (N6) engine sales, enabling Yuchai to reach volume commitment needed to negotiate further cost reductions on required parts, and 2) higher sales mix of the off-road segment.
Reiterate Add with higher TP of S$1.05
Maintain Add as we expect stronger net profit in 2H22F, underpinned by tailwinds from a recovery in Singapore’s construction activities. Our FY22-24F EPS is raised by 1.3-4.2% on stronger BMU volume assumptions; our SOP-based TP is raised slightly to S$1.05 accordingly. Potential catalysts include faster recovery in Singapore’s construction sector or Chinese government’s stimulus measures catalysing diesel engine sales. Downside risks include supply chain disruptions further dampening business sentiment in China.