Hong Leong Asia' s 20% stake in BRC Asia brings greater collaboration

 

HONG Leong Asia (HLA) - the trade and industry arm of the Hong Leong group - is forking out some S$68.1 million to increase its stake in Mainboard-listed steel-reinforcement solutions provider BRC Asia to 20 per cent through two transactions.

 

The first transaction involves Hong Leong Asia Investments - a wholly-owned subsidiary of HLA - which on Aug 28 agreed to subscribe to about 31 million placement shares of BRC Asia at an issue price of S$1.48 apiece. This amounts to a total price of some S$45.9 million.

 

The issue price was arrived at after negotiations between both parties on a willing-buyer and willing-seller basis, and represents a discount of about 2.06 per cent to the volume weighted average price of S$1.5111 per share for trades executed on the Singapore Exchange for the full market day on Aug 27.

 

This transaction will require the approval of BRC Asia' s shareholders at an extraordinary general meeting that will be convened. It was however noted that Esteel Enterprise, which currently owns a 68.96 per cent stake in BRC Asia, has given an undertaking to vote in favour of the transaction.

 

BRC Asia' s board of directors, meanwhile, say that the placement will enhance the company' s balance sheet and strengthen its capital base.

 

HLA on Aug 28 also simultaneously entered into a sale and purchase agreement with five of BRC Asia' s shareholders for the acquisition of 15 million ordinary shares at a unit purchase price of S$1.48, which amounts to a total cash consideration of S$22.2 million. These shares collectively represent about 6.16 per cent of the total number of issued shares in BRC Asia, excluding the 1.6 million shares that are held as treasury shares.

 

The five shareholders are Xinsteel Singapore, Nuocheng International Trading & Investment, Toe Teow Heng, Wu Ai Ping and Shi Yong.

 

The shares involved in both transactions will represent about 16.77 per cent of the total enlarged issued and paid-up share capital of BRC Asia.

 

Upon completion of the transactions, HLA will own about 54.9 million shares in BRC Asia, or about 20 per cent of the company' s total enlarged issued and paid-up share capital.

 

Prior to the announcement of these two transactions, HLA owned 8.86 million shares in BRC Asia, or a stake of about 3.64 per cent.

 

HLA said this would help expand its interest in the building materials sector in Singapore, and increase technology and automation opportunities for both companies.

 

HLA also cited the example of Prefabricated Prefinished Volumetric Construction (PPVC) building technology, which has synergies in concrete and steel reinforcement solutions. This area also presents opportunities for overseas growth in markets such as China and other South-east Asian countries that are working towards improving productivity in the building and construction sector.

 

For Q3 FY2021 ended June, BRC Asia reported net profit of S$10.2 million, compared to a net loss of S$2.5 million in the year-ago period. For the nine months ended June, the company' s net profit stood at S$29.3 million, up 46 per cent from S$20.1 million in the corresponding period last year.

 

Stephen Ho, chief executive of HLA, said: " " This is a unique opportunity to acquire a meaningful stake in BRC, a company steeped in history with a strong focus on innovation and its people.

 

" There is potential to generate synergy between our concrete and steel reinforcement capabilities as we pursue the path towards technology and automation in Singapore and markets beyond."

 

The transaction is expected to close before Dec 31, and is not expected to have any material impact on the net tangible assets per share or earnings per share of HLA in its current financial year.

HONG Leong Asia (HLA)' s shares have risen almost 20 per cent this year, and the counter touched a new 52-week intraday high of S$0.92 on Wednesday. But at least one analyst thinks shareholders are still getting a bargain.

 

CGS-CIMB has initiated coverage on the conglomerate with an " add" call and a target price of S$1.18.

 

At current levels, the brokerage said, investors are paying for HLA' s diesel engine segment while getting its building materials segment for free.

 

Part of the sprawling Hong Leong Group, HLA has three key business segments: diesel engines, building materials, and rigid plastic packaging.

 

The diesel engine business is parked under China Yuchai International, which is listed in New York. HLA owns 44.7 per cent of China Yuchai.

 

China Yuchai already trades at a relatively low 7.6 times' historical earnings, despite being a market leader in China. But CGS-CIMB reckons the counter is trading at only 5.6 times' expected earnings for the 2022 calendar year - a significant 60 per cent discount to its peers.

 

CGS-CIMB expects HLA' s China diesel engine business to ride on policy tailwinds, with pre-buying ahead of the nationwide implementation of National VI engine standards in July 2021.

 

Meanwhile, a potential secondary listing of China Yuchai in Hong Kong or China could be a re-rating catalyst for HLA. Assuming the discount versus peers is narrowed to 30 per cent, CGS-CIMB' s target price for HLA would rise to S$1.33.

 

As for HLA' s building materials business, CGS-CIMB expects the segment to recover as construction activities resume. The segment' s profit before tax is forecast to grow by 72 per cent to S$21.9 million in FY2021.

 

The research house forecasts net profit after tax growth of 54 per cent in FY2021 for the group.

 

Shares of HLA closed 10.3 per cent or 8.5 Singapore cents higher at S$0.91 on Wednesday, or 15 times' historical earnings.

 

HLA has a market capitalisation of S$676.4 million, while China Yuchai has a market capitalisation of US$657.8 million.