SINGAPORE (Aug 10): DBS is maintaining its “buy” on Hong Leong Finance with $3.20 target price given further relaxation of funding and lending rules, as well as M&A newsflow are potential catalysts for stock price re-rating.
In a Thursday report, DBS believes under an M&A scenario, Hong Leong Finance should attract a minimum 1x book value or $3.80 as current shareholders are unlikely to sell out at lower valuations given its strong prospects under this new regulatory regime.
In mid Feb, MAS relaxed its rules on finance companies, which lifted the limits on uncollateralised loans as a percentage of capital funds to 25% of capital funds from 10% and liberalised its existing policy to allow a foreign takeover of a finance company, opening up new opportunities for players.
Post MAS’ rule relaxation, all three fincos have re-rated to price in a possibility of M&A. However, Hong Leong Finance’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, says DBS analyst Lim Sue Lin in the report.
In 2Q17, Hong Leong Finance’s earnings grew strongly by 89.1% y-o-y, primarily aided by 44.5% higher fee and commission income, lower cost of funds due to low fixed deposit rates in Singapore, and lower staff costs and provisions.
For 1H17, Hong Leong Finance recorded 45.9% growth in bottom line.
“We expect Hong Leong Finance to pay 11.5 cents dividend for FY2017, which represents dividend yield of 4.37% at last close price of $2.63,” says Lim.
Shares in Hong Leong Finance are up 4 cents at $2.67.
