We continue to like HLI for its robust business model, leading market position and promising earnings prospects across its business units. We expect earnings to be decent in the coming quarters thanks to the stronger performance from its Vietnam associate. We are keeping our earnings estimates and BUY call together with an SOP-based TP of MYR8.63 (26% upside).

Exports and associates to drive near term earnings. Hong Leong Industries’ (HLI) Yamaha motorcycles franchise in Malaysia and Vietnam contributed >60% to FY15 earnings and there is still room for growth given the young 90m population in Vietnam. Apart from that, improving export dynamics on weaker MYR and an internal rationalisation should continue to widen margins for its building materials unit going forward. Meanwhile, HLI’s 9MFY16 (Jun) results came in well within our expectations, making up 74.6% of our full-year estimates but above street forecasts. The major surprise was its board’s decision to declare a second interim (19 sen) and special dividends (10 sen), which brings the cumulative single tier dividend to 42 sen, ie higher than our 36 sen/share estimate for FY16.

Forecast and risks. We are keeping our earnings estimates unchanged. Key risks are lower-than-expected sales, which can reduce HLI’s topline and bottomline, as well as a sudden weakness in the USD – this may dampen its export sales.

Reiterate BUY and MYR8.63 TP. HLI’s net cash position and strong cash-generating ability should allow the board to pay out >50% of earnings as dividends. That said, we continue to assume a 50% payout moving forward, other than a one-off adjustment to its FY16 dividend. Our SOP-based valuation using FY17 forecasts derived a TP of MYR8.63, which implies only 10.5-11.9x FY16F-18F EPS. This suggests that there may be a further P/E re-rating when market sentiment improves. Maintain BUY.

Financial Exhibits

SWOT Analysis

Source: RHB Research - 20 Apr 2016