Hong Leong Finance - DBS Research 2017-04-28: Poised For Loan Growth Recovery

Hong Leong Finance - DBS Vickers 2017-04-28: Poised for loan growth recovery HONG LEONG FINANCE LIMITED S41.SI

Hong Leong Finance - Poised for loan growth recovery

  • 1Q17 earnings rose 13.2% y-o-y and 12.0% q-o-q.
  • Loan growth to stage recovery.
  • New opportunities abound; M&A potential. 
  • Maintain BUY with TP of S$3.20.



New opportunities abound; M&A potential. 

  • MAS’ rule relaxation on finance companies (fincos) in mid-Feb 2017, which lifted the limits on uncollateralised loans as a percentage of capital funds (from 10% to 25% of capital funds) and liberalised its existing policy to allow a foreign takeover of a finco (subject to certain conditions), opens new opportunities for Singapore fincos. 
  • Hong Leong Finance (HLF), the largest of the three fincos in Singapore, is poised to benefit.


Highlights 


1Q17 earnings increased 13.2% y-o-y and 12.0% q-o-q.

  • HLF recorded 13.2% y-o-y,12.0% q-o-q increase in bottom line.
  • On a q-o-q basis, earnings growth was primarily driven by net interest income (+10%) partly offset by higher staff costs due to seasonal effects. On a y-o-y basis, earnings growth was aided by lower interest expense, and higher fee and commission income, partly offset by lower interest income.

10% higher net interest and hiring charges income q-o-q.

  • Interest income was down 3.6% q-o-q against higher hiring charges and other interest income, against lower interest expense on loans due to lower base and lower applicable interest rates. Interest expense was down 10%.

Write-back of provisions. 

  • There was a small provision writeback of < $1m, which is not unusual for HLF.


Outlook 


Loan contraction bottoming out; set for loan growth recovery. 

  • HLF’s loan book as of 31 Mar 2017 remained flat q-o-q. We believe that loan contraction seen during FY2016 may be over and loans are set to recover, supported by better economic conditions with encouraging signs of an improving property market and GDP outlook. We expect FY17 loan growth of 3.5%.

Poised to benefit from lower interest expense. 

  • We believe that HLF is set to benefit from lower interest expense, as a large portion of the fixed deposit cost for the year has been locked in.


Valuation and Recommendation 


Maintain BUY with TP of $3.20. 

  • Our TP of S$3.20 offers 18% upside potential, and is derived from the Gordon Growth Model with 5.1% ROE, 1.5% long-term growth and 5.8% cost of equity, implying c.0.8x FY17F BV. 
  • Under an M&A scenario, we believe HLF should attract a minimum 1x BV S$3.87 as current shareholders are unlikely to sell out at lower valuations given its strong prospects under this new regulatory regime; this implies there is a minimum potential upside of c.40% over last close of S$2.76.


Where we differ. 

  • We are the only broker covering the stock.
  • Potential catalyst. Further relaxation of funding and lending rules, as well as M&A newsflow are potential catalysts for stock price re-rating.


Key Risks to Our View

  • As a smaller financial institution, and with exposure to riskier business lending, HLF may be more prone to asset-quality upsets should the economic cycle deteriorate. 
  • Also, HLF is more sensitive to changes in fixed deposits rate, in contrast to banks who have a large CASA base.



Sue Lin LIM DBS Vickers | Singapore Research DBS Vickers | http://www.dbsvickers.com/ 2017-04-28
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.200 Same 3.200



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