Hong Leong Industries Bhd (HLIB) is shifting towards more premium products and strong margins realised for new models, driving better earnings for the group, according to Kenanga Research.
The research house raised its FY24 and FY25F net profit forecasts by 6% each to reflect the better margins.
Correspondingly, it upgraded its target price (TP) by 11% to RM11.70 from RM10.50 and maintained its OUTPERFORM call.
“Our TP is after we rolled forward our valuation base year to FY25F from FY24F an on unchanged price-earning ratio (PER) of 12 times, at a 1 time multiple premium to passenger vehicle sector’s average forward PER of 11 times given its strong market position in the local motorcycle segment.
“There is no adjustment to our target price based on environmental, social, and governance (ESG ) given a 3-star rating as appraised by us,” it said in its Results Note today (Feb 22).
The group’s first half financial year ended on 31 December 2023 (1HFY24) core net profit rose 10% year-on-year (YoY) driven by price hikes, a shift toward more premium products and strong margins realised for new models.
“This is due to a shift in product mix away from mass-market models, 125-cc and below, of which demand is slowing, and towards more premium models such as Y16ZR and Y15ZR, and higher-than-expected margins realised from the new-generation Y15ZR SE, XMax 250 and
Ego Gear.”
Kenanga said HLIB’s 1HFY24 core net profit, excluding RM18.5 million gains from the disposal of Hume Cemboard Industries Sdn Bhd, beats its expectation at 60% of our full-year forecast.
“The variance against our forecast came largely from stronger-than-expected margins from new models. There is insufficient research coverage by the market to form consensus estimate,” it said.
For the quarter under review, HLIB declared a special net dividend per share (NDPS) of 50 sen (ex-date: 27 Mar 2024; payment
date: 29 Mar 2024) in the second quarter ended on 31 December 2023 (2QFY24).
In the previous year (2QFY23), there is none declared. This brings 1HFY24 NDPS to 70 sen compared to 20 sen in 1HFY23, above our expectation.
YoY, its 1HFY24 revenue fell 8% mainly due to weaker motorcycles sales on the back of credit tightening by motorcycle financiers. Its plant
utilisation levels in both Yamaha Motor and Guocera production plants remained stable at 70% to 80%.
Meanwhile, it said that its associate Yamaha Motor Vietnam (YMVN) saw weaker contribution of RM10 million, lower by 9% due to market share loss.
The research house continue to like HLIB for its strong proxy the booming gig economy given, for its association with the strong Yamaha motorcycle brand in Malaysia, for its strong war chest with a net cash of RM1.6 billion and its attractive dividend yield at 6%.
The risks to Kenanga’s call include consumers cutting back on discretionary spending, supply chain disruptions, escalating input costs, and a global recession.
