We are issuing a “Not Rated” call on HLIND with a FV of RM9.14 based on a SoP valuation on FY18E numbers. The primary growth catalyst for the group is the increasing brand acceptance and growing demand for Yamaha motorcycles, especially in the Vietnam market where it has associate exposure. Efforts to expand other business segments, however, may only see results in the mediumterm.

A conglomerate in consumer products. HLIND is principally involved in the manufacturing and trading of CKD and CBU Yamaha motorcycles in Malaysia, while also holding a 24% associate-stake in Yamaha Motor Vietnam Co. Ltd (YMVC). In addition, the group is the largest ceramic tile manufacturer and exporter in the country through the Guocera brand. The group is also involved in industrial products, which consist the trading and manufacturing of fibre cement (where it is one of two players in the country’s duopoly for such products) and concrete roofing under the Hume brand (refer to overleaf for further information on the business segments).

Starting FY17 with a bang. In its reported 1Q17 results, the group registered a revenue growth of 9% YoY to RM563.6m, owing to stronger sales in motorcycle and ceramic tiles (which collectively grew 13% YoY) but partially offset by lower industrial product segment (-2% YoY) as a result of slowing property development and weaker market condition in the country. At PBT level, the group yielded an 8% YoY growth to RM61.1m, thanks to higher contribution from the consumer products segment (+27% YoY). Net earnings of RM77.3m (+43% YoY) was also backed by strong associate contributions from YMVC of RM30.7m (+256% YoY).

Riding on Yamaha. Despite declining local motorcycle TIVs, the market has responded favourably to newer and more attractive premium Yamaha models, causing a shift from lower tier offerings. The group aims to further capitalise on this by allocating more resources into future product developments. With this, an uplift in local TIV may yield stronger-than-expected performance from the recovery in consumer spending habits. Besides, we believe there is an excitement in its Vietnam’s operation, judging by the fast-growing and young population of over 90.0m people where motorcycles are the primary mode of transportation. The group’s top motorcycle brand, Yamaha, also enjoys favourable reception and increasing demand from effective marketing strategies, as seen by its 3-year CAGR in associate earnings of 33% (refer to overleaf for details on future plans to improve other business segments).

For FY17E/18E, we expect revenue to improve moderately by c.5%/c.4% to RM2.3b/RM2.4b from the gradual recovery in the domestic performance. Meanwhile, net earnings could expand by c.12%/c.8% to RM325m/RM351m thanks to stronger associate earnings contribution from YMVC, which is expected to garner 22%/15% YoY growth. This should translate to PATAMI EPS of 86.9 sen/93.9 sen for FY17E/FY18E. In terms of dividends, we apply a dividend pay-out ratio of 50%, which is closely in line with the group’s 3-year average. This should lead to DPS payment of 43.5 sen/46.9 sen or dividend yield of 4.6%/5.0%.

Not Rated with a fair value of RM9.14, based on our SoP valuation (refer to overleaf) on the group’s core business segments. We believe our valuation is fair as each segment is valued closely in line with their respective peer. The ascribed valuation also translates to a FY18E PER of 10.0x, a premium from FBMSC’s 2-year Fwd. PE of 8.3x. However, this may be justified by the lower expected dividend yield of 2.7% for FBMSC against the HLIND’s FY18E dividend yield of 5.0%.

Future plans to improve other segments. Management has expressed its intention to expand on its presence in the ceramic tiles market by investing into new digital printing and production technologies for non-conventional tiles within the coming years. Furthermore, order capabilities could be improved by increasing the group’s dependency on OEM suppliers. On the industrial products segment, given the state of the poor domestic economy and highly price-competitive duopoly environment, the group will focus on further improving export sales particularly to its larger clientele in Australia and Philippines where demand remains healthy, while also to leverage on strong USD rates for better earnings.

Source: Kenanga Research - 20 Dec 2016