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Hong Leong Industries Bhd

HLI (Fundamental: 1.7/3, Valuation 1.8/3) is primarily involved in the manufacture and sale of consumer products — Yamaha-branded motorcycles, scooters and related parts and products, as well as Guocera ceramic tiles. Yamaha is one of Malaysia’s leading motorcycle manufacturers with 30% market share while Guocera supplies an estimated one-third of floor and wall tiles in the country. 

HLI also manufactures and sells industrial products, comprising fibre cement and concrete roofing products. For FYJune2014, consumer products accounted for 66.3% of sales and 87.3% of EBIT with the balance coming from industrial products segment. 

Last year, the company completed the sale of its concrete business and 175 million irredeemable convertible preference shares (ICPS) in Hume Cement Sdn Bhd to Narra Industries (now known as Hume Industries) for RM48 million and RM300 million, respectively. 

The disposals were satisfied by the issuance of new Narra shares, all of which HLI distributed back to its shareholders. We view these disposals positively, as it allows HLI to concentrate on its core businesses, which earn better profit margins and above-market-average ROEs. 

It also strengthened HLI’s balance sheet, reversing a net debt of RM480.7 million in FY2013 to net cash of RM167.9 million or 52.6 sen per share. The stronger balance sheet is supportive of better dividend payout, which averaged 46% over the last four years.

And the company has been paying more. Dividends increased from 10 sen per share in FY2009 to 20 sen in FY2011 and 25 sen in FY2014, which translated into a net yield of 5.6%. For 9MFY2015, dividends totalled 29 sen per share.

Going forward, we expect stable growth for its consumer products segment as well as better performance for the industrial products segment, following the completion of capacity expansions. 

The stock currently trades at undemanding valuations — trailing 12-month P/E of 8.3 times and 1.2 times book.

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This article first appeared in The Edge Financial Daily, on June 16, 2015.

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