HONG LEONG FINANCE LIMITED
S41.SI
Hong Leong Finance - Stellar Earnings Recovery
- Hong Leong Finance's 2Q17 bottom line posted stellar 89% y-o-y/ 27% q-o-q growth.
- High growth in fee and commission income (+44.5% yo-y), lower cost of funds, staff costs, provisions were key positives.
- Await implementation of changes to Finance Company regulations.
- Interim dividend of 4 Scts declared (2016A: 3 Scts); expect FY17F dividend yield of 4.3%, maintain BUY with TP 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.
Strong earnings recovery, expect FY17F dividend yield of 4.3%.
- 2Q17 earnings grew strongly by 89.1% y-o-y/26.8% q-o-q, primarily aided by high growth in fee and commission income (+44.5% y-o-y), lower cost of funds due to low fixed deposit rates in Singapore, and lower staff costs and provisions.
- For 1H17, HLF recorded 45.9% growth in bottom line. We expect HLF to pay ~11.5 Scts dividend for FY2017, which represents dividend yield of 4.37% at last close price of S$2.63.
Where we differ. We are the only broker covering the stock.
- Post MAS’ rule relaxation, all three fincos have re-rated to price in a possibility of M&A. However, we believe HLF’s current share price has yet to price in this year’s earnings recovery, as well as its strength as the largest finco in Singapore.
Potential catalyst.
- Further relaxation of funding and lending rules, as well as M&A newsflow are potential catalysts for stock price re-rating.
Valuation: TP of S$3.20, maintain BUY.
- Our TP of S$3.20 offers 22% 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 a M&A scenario, we believe HLF should attract a minimum 1x BV (~S$3.80 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$2.63.
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.
WHAT’S NEW
Stellar earnings growth in 2Q17. 89.1% y-o-y/ 26.8% q-o-q growth in bottom line.
- HLF recorded stellar earnings growth of 89.1% y-o-y/ 26.8% q-oq in 2Q17 of S$20.9m. On a q-o-q basis, earnings growth was primarily driven by lower cost of funds (-13.4%) and higher fee and commission income (+11.4%).
- On a y-o-y basis, lower costs of funds (-30.2%), higher fee and commission income (+30.8%) and lower staff costs (-6%) were offset by a decline in interest income.
- For 1H17, HLF saw 45.9% growth in bottom line.
Higher interest income q-o-q encouraging.
- 2Q17 posted 2.2% q-o-q increase in interest income to S$73.7m from increase in interest on loans and hiring charges, compared to the decline registered in 1Q17, which was encouraging.
- On a y-o-y basis, decrease in interest income was mainly due to a drop in loan base and a lower loan yield.
Strong growth in fee and commission income.
- Strong growth of 30.8% y-o-y/11.4% q-o-q in fee and commission income (S$4.1m) was driven by both lending and non-lending products, helping to offset the impact from lower interest income.
Lower provisions.
- Provisions decreased from S$1.9m in 2Q16 to S$0.7m in 2Q17. For 1H17, there was a small provision write-back of
Outlook
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.
Loan growth outlook flat YTD, likely to have bottomed.
- Loan growth was flattish, at +0.4% higher YTD. We remain positive that loan contraction has bottomed out as loan book remained largely flat q-o-q after seeing a contraction through FY2016.
- We believe that loan growth is set for recovery against better economic conditions with encouraging signs of an improving property market and GDP outlook.
Expect higher dividend for full year.
- Interim dividends of 4 Scts was declared (2016A interim dividend: 3 Scts). HLF’s dividend payout ratio has been ~67% for FY2015A and FY2016A, and higher in previous years.
- Assuming a 67% dividend payout ratio for this year, we are expecting ~11.5 dividend for the full year (~7.5 Scts final dividend on top of 4 Scts interim dividend declared) based on our earnings estimate, which brings dividend yield to 4.37% for the full year at last closing price of S$2.63.
Await implementation of changes to Finance Company regulations.
- MAS announced various changes in 1Q17. HLF is currently awaiting implementation of these changes, which is likely to come in 2H17.
Seeking ways to collaborate with FinTechs.
- HLF is seeking ways to collaborate with FinTechs as HLF recoginses that FinTechs can bring about process simplification and improvement, as well as deliver a more technologically driven customer experience for the younger generation.
- We expect any collaboration to be a plus for HLF, potentially improving processes and driving down costs.
Sue Lin LIM
DBS Vickers
|
Singapore Research
DBS Vickers
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http://www.dbsvickers.com/
2017-08-10
DBS Vickers
SGX Stock
Analyst Report
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