SINGAPORE (Feb 28): DBS Vickers is maintaining Hong Leong Finance (HLF) at "buy" on strong earnings growth momentum while 4Q17 and FY17 results exceeded expectations of the research house.
HLF recorded 4Q17 net profit of $24.8 million, up 68.7% y-o-y. This brings FY17 net profit 61.5% higher to $85.7 million. This was due to strong growth of hiring charges and fee income. Loan yields also continued to improve while cost of funding fell.
In 2Q17, HLF reversed the trend of negative loan growth. Since then, it has registered three straight quarters of growth.
"We continue to look forward to 3% loan growth in FY18 on better economic conditions with encouraging signs of an improving property market and GDP outlook," says analyst Lim Sue Lin in a Wednesday report.
In FY17, HLF’s total provisions stood at $3.7 million despite a larger loan book.
"We remain confident in HLF’s asset quality as demonstrated by its low provision and NPL (non-performing loan) levels historically," says Lim, "What remains a wildcard is the effect of the implementation of IFRS9/SFRS109."≠≠≠≠≠
With deep expertise in auto-financing, HLF has now started financing car rental businesses. Lim believes this new segment will further help cement HLF’s position in the auto-financing sector.
In addition, HLF has partnered IMDA to pilot technology solutions for SMEs to improve productivity and competitiveness and “go digital”.
HLF is also identifying suitable fintech companies which are able to help HLF with data management and other operational requirements.
"We believe HLF has room to improve its cost-to-income ratio with such initiatives if a suitable partner is found," says Lim.
Meanwhile, the Monetary Authority of Singapore has gazetted some of the initiatives granted to finance companies on Dec 1 2017.
"We continue to monitor this space and believe that higher unsecured lending limits present further lending opportunities to HLF for SMEs," says Lim.
HLF declared a final dividend of 9 cents/share, bringing full year dividend for FY17 to 13 cents, representing a 5% dividend yield.
"Maintain 'buy' with target at $3.20," says Lim, "Our target of $3.20 is derived from the Gordon Growth Model with 5% ROE, 2% long-term growth and 6% cost of equity, implying 0.8 times FY17 book value. The current dividend yield level of 5% is attractive."
As at 2.38pm, shares in Hong Leong are up 2 cents at $2.70 or 13.4 times FY18 forecast earnings.
