Hong Leong Asia Ltd (SGX:H22), a SGD$422.52M small-cap, operates in the machinery manufacturing industry, which faces increasing demand of capital equipment and machinery from developing economies in Asia, Latin America and the Middle East. Capital goods analysts are forecasting for the entire industry, negative growth in the upcoming year . Below, I will examine the sector growth prospects, as well as evaluate whether Hong Leong Asia is lagging or leading in the industry. Check out our latest analysis for Hong Leong Asia
What’s the catalyst for Hong Leong Asia’s sector growth?
Machinery manufacturers face the challenge of managing a plethora of new data so that it becomes useful, adapt technology to run their supply chains and operations more efficiently, and build strategic partnerships that will help grow market share. In the previous year, the industry saw growth in the forties, beating the Singapore market growth of 8.07%. Hong Leong Asia lags the pack with its lower growth rate of 30.49% over the past year, which indicates the company will be growing at a slower pace than its machinery peers. As the company trails the rest of the industry in terms of growth, Hong Leong Asia may also be a cheaper stock relative to its peers.
Is Hong Leong Asia and the sector relatively cheap?
Machinery companies are typically trading at a PE of 10x, relatively similar to the rest of the Singapore stock market PE of 15x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 10.74% compared to the market’s 7.99%, potentially illustrative of past tailwinds. Since Hong Leong Asia’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Hong Leong Asia’s value is to assume the stock should be relatively in-line with its industry. In terms of returns, Hong Leong Asia generated 3.28% in the past year, which is 7% below the machinery sector.
What this means for you:
Are you a shareholder? Hong Leong Asia has been a machinery industry laggard in the past year. If your initial investment thesis is around the growth prospects of Hong Leong Asia, there are other machinery companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how Hong Leong Asia fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If Hong Leong Asia has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its machinery peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at Hong Leong Asia’s future cash flows in order to assess whether the stock is trading at a reasonable price.