Underground and Overground: Booming Construction Sector Will Benefit Many Players. Here's one example ...

THE CONTEXT • A couple of construction stocks are hitting the 'buy' list of analysts. Mundane as they may sound, these businesses have done pretty well and some investors recognise the industry upcycle.   • Consider some mega projects: » Changi Airport's Terminal 5 is expected to start construction in 1H2025 and be operational in the mid-2030s. » Tuas Port is being developed in four phases and will be the world’s largest fully automated port when completed in the 2040s. » Cross Island Line, Singapore's longest fully underground MRT line (> 50 km). Construction for Phase 1 & 2 is expected to be completed by 2030 and 2032, respectively. • The Building and Construction Authority projects total construction demand in 2025 at S$47 - S$53b, a sharp increase from S$44.2b in 2024.  • This robust demand will benefit the entire construction supply chain. One player -- Hong Leong Asia -- was named in a new report by UOB Kay Hian, which raised its target price for the stock from $1.11 to $1.46.  • The graphic above depicts the 2 key business segments:   » China Yuchai, a 49%-owned subsidiary, is a leading player in diesel engines for various applications, including trucks and industrial and marine. » Another core segment is the building materials unit (BMU) which is involved in the following: Ready-Mixed Concrete: Produced in Singapore. Precast Concrete Elements: Include components for public housing construction, fabricated in factories in Singapore and Senai, Malaysia. Aggregates: Supply of aggregates, with stockyards  in Singapore and a granite quarry in Johor, Malaysia. Cement: Imports and distributes cement in Singapore. Prefabricated Components: Manufacture of Prefabricated Prefinished Volumetric Construction (PPVC) modules, Precast Bathroom Units (PBUs), household shelters, refuse chutes, staircases, and large panel slabs.  • Aside from strong earnings growth, UOB KH is forecasting Hong Leong Asia's FY25 NAV/Share will reach $1.46, and FY25 net cash/share at $0.95. • Read more below ....

Excerpts from UOB Kay Hian report
Analysts: Llelleythan Tan Yi Rong & Heidi Mo


Hong Leong Asia (HLA SP)
Attractive Valuations Despite Recent Rise In Share Price Performance

• Expect robust earnings growth. Given the strong expected growth for both the BMU segment and China Yuchai, we expect HLA’s PATMI to grow by 23.0% yoy for 2025 and 11.9% yoy for 2026 respectively.

HLA is also implementing cost efficiency initiatives that would help support and expand margins moving forward.

We forecast 2025-27 PATMI at S$79.4m, S$88.8m and S$102.4m respectively.

EARNINGS REVISION/RISK

• Earnings revision: None.

VALUATION/RECOMMENDATION • Maintain BUY with a higher SOTP-based target price of S$1.46 (S$1.11 previously), valuing the BMU and diesel engine segments at S$854m (6.4x 2025F EV/EBITDA multiple) and S$769m (6.0x 2025F EV/EBITDA multiple) respectively. Llelleythan Tan, analystThe increase in target price is due to a higher market valuation for its stake in BRC Asia along with a higher EV/EBITDA multiple used for the BMU segment (4.0x 2025F EV/EBITDA multiple previously), given the robust outlook for the construction sector. • With HLA’s current market cap at around S$763m, we still think that HLA remains undervalued, specifically its BMU segment which is currently being neglected by the market, in our view.

SHARE PRICE CATALYST

• Earnings surprise from better-than-expected engine and building materials sales.
• Better-than-expected dividend.

Full report here.