We believe HIL’s earnings to have bottomed in 1HFY20 and expect to rebound strongly in 2HFY20 and continued its earnings growth into FY21-22. Growth will be underpinned by: (i) plastic manufacturing for automotive sector driven by increasing TIV (especially Perodua) with higher content/car; (ii) new contribution from PPE manufacturing; and (iii) sustaining contributions from property development with upcoming new launches. We derive a fair value of RM1.18 (fully diluted basis) on HIL based on PER 12x FY21 earnings + current net cash position RM34.2m + company warrant proceeds of RM59.7m.

Background. HIL is involved in 2 major businesses, namely: (i) supplying of plastic parts and components mainly to the automotive industry in Malaysia (as well as some supply to E&E industry in Malaysia and IT industry in China); and (ii) property development in Malaysia. HIL has also recently ventured into PPE (mid-2020) by commencing 3-ply mask production.

Growing automotive contribution. HIL has registered increasing earnings from its core manufacturing business to the automotive industry (main client - Perodua) as the group leverages on the growing TIV and higher content/car over the years in line with Malaysia automotive policy for higher local contents. HIL has been improving its production capability and became a Tier 1 category within the automotive supply chain. Going forward, growth will be mainly driven by stream of upcoming new model launches including Perodua D55L SUV (Kembara) and expected Myvi facelift in 2021.

New PPE contribution. PPE contribution is expected to be material to HIL in 2021 as the group ramps up its 3-ply mask production capacity to 30m/annum (up to 60m/annum by increasing the work shift) and commence production of N-95 mask. Mask has become a global necessity as increasing governments around the world have made it compulsory to wear masks in bid to control Covid-19. HIL has already started distribution within Malaysia and is expected to start exporting, pending FDA certificates (USA) and CE marking (Europe) by end-2020.

Sustainable property contribution. HIL Property is focusing on quick turnaround land-bank for landed developments at an affordable pricing range (RM380-800k) in matured areas of Shah Alam and Klang. The group is an asset light property developer with the advantage of leveraging onto its major shareholder’s private property arm (Amverton), which has huge land-bank of c.4,000 acres. The segment has been contributing positively to the group for FY18-19, driven by existing 3 projects with GDV RM324.4m, which will complete by 2020/2021. Another 3 projects with GDV RM199m is already slated in the pipeline for launchings in 2021/2022 to ensure earnings sustainability.

Financial growth. Despite the impact of Covid-19 and MCO during 1HFY20, we expect earnings to rebound strongly in 2HFY20 (driven by automotive segment); FY20 earnings should almost match that of FY19. FY21 earnings growth will be driven by manufacturing segment (new Perodua models with higher contract component/model) and new PPE segment while FY22 earnings will be driven by manufacturing segment and property development segment (new launches).

Fair value of RM1.18. We derive a fair value of RM1.18 (fully diluted basis) on HIL based on PER 12x FY21 earnings + current net cash position RM34.2m + company warrant proceeds RM59.7m. We opine that the valuation is justifiable by: (i) healthy balance sheet with net cash position; (ii) manufacturing sales growth; (iii) new PPE contribution; and (iv) sustainable property development earnings.

Source: Hong Leong Investment Bank Research - 13 Nov 2020