By G. Sharmila
Hong Leong Industries Bhd (HLI) is usually synonymous with Yamaha motorcycles and ceramic tiles. Some analysts seem to suggest that the company is a good dividend play, especially following the recent completion of its restructuring exercise. But is it really worth investors’ time of day?
Business model: HLI, which is part of the Hong Leong Group of companies, manufactures and sells consumer and industrial products in Malaysia, Asia, Europe, Australasia and other countries. The company was incorporated in 1964 and was formerly known as Fancy Tile Works Limited. It changed its name to Hong Leong Industries Bhd in 1979.
According to bursamarketplace.com, HLI’s consumer products segment manufactures, assembles and distributes motorcycles, scooters, as well as related parts and products; and manufactures and sells ceramic tiles.
The industrial products segment meanwhile, manufactures and sells fibre cement and concrete roofing tiles. HLI is also involved in the research and development of ceramic tiles and related products; procurement and sale of raw materials, parts and components, and finished products of ceramic tiles for the local and export markets; trading of ceramic tiles; distribution of building materials; and property management activities.
Shareholders and management: According to Bloomberg, the major shareholders of HLI are Hong Leong Manufacturing Group Sdn Bhd (75.39%), Hong Leong Industries (3.48%) and Public Smallcap Fund (1.37%) . At the forefront of the company are its chairman Kwek Leng San and group managing director Jonathan Forrest Wilson. Singaporean Kwek Leng San is brother to business tycoons Quek Leng Chan and Quek Leng Chye, who are both major shareholders of HLI.
HLI chairman Kwek Leng San is 59 and graduated from the University of London with a Bachelor of Science (Engineering) degree. He also holds a Master of Science (Finance) degree from City University London. According to HLI’s 2014 annual report, he has “extensive business experience in various business sectors, including financial services and manufacturing”.
Kwek was appointed to the HLI board in September 1990 and assumed the dual roles of president and chief executive officer of the company in 1993. He was appointed chairman of HLI in February 2012. He is also the chairman of Malaysian Pacific Industries Berhad, Narra Industries Berhad and Southern Steel Berhad. He is also a director of Hong Leong Company (Malaysia) Berhad and the Hong Leong Foundation.
According to the annual report, group managing director Jonathan Forrest Wilson aged 50, an American, graduated with a Bachelor of Science in Chemical Engineering from Catholic University, Washington DC. He also holds a Master in Business Administration, Rutgers University Executive Program, Singapore.
Wilson has worked in Asia for over 20 years, most recently as chief operating officer of Gold Coin Group. Wilson has also worked with specialty chemical company, Great Lakes Chemical in various regional roles throughout the Asia-Pacific. He joined HLI as group managing director in January this year.
Share performance: As of October 30th, HLI’s 52-week trading range has been RM3.95 to RM7.54. Its one-year return according to Bloomberg data, has been 4.41%, which is comparable to the FBMKLCI’s return of 4.42%. Reuters data meanwhile, shows that trading in HLI has been less volatile than market average, as the stock has a beta coefficient of -0.27. A negative beta indicates the stock moves opposite to the market.
The company’s share price has been on the downtrend after peaking at RM8.60 on September 25th this year. On October 30th, it closed 13 sen higher at RM4.52.
What analysts think: Research house UOB Kay Hian noted in a report dated October 27th, that the listing of new Narra shares last Friday marked the completion of HLI’s restructuring exercise, which has created “meaningful shareholder value” with a year-to-date gain of 70%.
“Post the restructuring exercise and share price adjustment, HLI has emerged as an attractive dividend stock with 6%-7% yields in FY15-17, assuming a payout ratio of 50%. We estimate there could be 0.5-1.0 percentage point upside to the yield as HLI may pay up to 55% of its earnings given the company has no significant capex over the next two years,” the research house opined.
UOB Kay Hian expects HLI to deliver recent first quarter 2015 (1QFY15) quarter-on-quarter results, supported by improvements across all divisions. It noted that despite the overall local motorbike market seeing a slowdown in sales in the first half of 2014, Yamaha Motor recorded a slight improvement in sales volume and has overtaken Honda as the leader in the local market.
“While we do not expect the motor division’s growth to accelerate in the near future, particularly after the implementation of GST in April 2015 which could dampen consumer spending, we believe HLI’s strategies, which include the introduction of affordable models (<RM5,000/unit), would help in defending its market leader position with tepid 3-4% net profit growth per annum,” the research house said.
The research house also expects HLI’s building materials division to see improvement. “For the tile division, a better product mix and the company’s strategy to focus on more profitable Asian and Australian export markets would partially offset the exclusion of Hume Concrete’s earnings from the group 2QFY15 onwards. Meanwhile, for its fibre cement division, management expects it to bottom out in 2HFY15, once its new capacity that just came on stream stabilises.”
It added that given the company’s “pedestrian but stable earnings growth prospects” through FY2017, HLI’s valuation will be dictated by dividend yield and capital management. It said that it values the stock within its recent years’ dividend yield range (without corporate exercises) of 5%-6%.
Earnings forecast:
Stockstalk: Kinibiz contacted the company for comments on its future prospects and industry outlook, but has yet toreceive any answers. We are inclined to agree with UOB Kay Hian that the prospects from the company’s different divisions seem good, chief of which is the auto division, where Yamaha has managed to outperform the market in the first half of this year. We are a little concerned about the GST’s impact on consumer spending though, and wonder if the research house is a little too optimistic about the willingness of consumers to buy the so-called affordable models.
However, we think that the company’s stable earnings and balance sheet (from perusing the 2014 annual report) are a positive for the company and enhances the attractiveness of the stock, which is also appears to be a decent dividend play. The company’s share price has not being doing well though, so investors may want to buy on the weakness of the stock and be patient with the lacklustre share price performance. Things may very well pick up for the stock and company as suggested by UOB Kay Hian and investors could be pleasantly rewarded in the long run.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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