When Should You Buy Hong Leong Asia Ltd. (SGX:H22)?

While Hong Leong Asia Ltd. (SGX:H22) might not be the most widely known stock at the moment, it saw a double-digit share price rise of over 10% in the past couple of months on the SGX. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Today I will analyse the most recent data on Hong Leong Asia’s outlook and valuation to see if the opportunity still exists.

See our latest analysis for Hong Leong Asia

What's The Opportunity In Hong Leong Asia?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Hong Leong Asia’s ratio of 8.63x is trading slightly below its industry peers’ ratio of 8.9x, which means if you buy Hong Leong Asia today, you’d be paying a reasonable price for it. And if you believe that Hong Leong Asia should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. So, is there another chance to buy low in the future? Given that Hong Leong Asia’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

Can we expect growth from Hong Leong Asia?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With profit expected to grow by 33% over the next couple of years, the future seems bright for Hong Leong Asia. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What This Means For You

Are you a shareholder? It seems like the market has already priced in H22’s positive outlook, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at H22? Will you have enough confidence to invest in the company should the price drop below the industry PE ratio?

Are you a potential investor? If you’ve been keeping tabs on H22, now may not be the most advantageous time to buy, given it is trading around industry price multiples. However, the positive outlook is encouraging for H22, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

So while earnings quality is important, it's equally important to consider the risks facing Hong Leong Asia at this point in time. Every company has risks, and we've spotted 1 warning sign for Hong Leong Asia you should know about.

If you are no longer interested in Hong Leong Asia, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.