SINGAPORE (April 5): DBS is starting coverage on Hong Leong Finance with a “buy” and target price of $3.20 on possibility of an M&A while new opportunities abound.
The rule relaxation by MAS on finance companies in mid Feb opens new opportunities for Singapore fincos, says DBS.
This included the lifting of limits on uncollateralised loans as a percentage of capital funds from 10% to 25% and the liberalisation of its existing policy to allow a foreign takeover.
(See also: MAS gives finance companies a leg-up)
“Hong Leong Finance (HLF), the largest of the three fincos in Singapore, is poised to benefit, in our view,” says analyst Lim Sue Lin in a Wednesday report.
With over 50 years of lending experience to Small-Medium Enterprises, Hong Leong Finance dominates the finco lending space, accounting for more than 75% of the total loans of local fincos.
Hong Leong Finance also has the biggest branch network among the three fincos with 28 branches and 10 SME centres across Singapore.
“Hong Leong Finance’s strength lies in property-related financing (78% of loans) and hire purchase and block financing (16% of total loans),” says Lim.
DBS estimates 44% growth in Hong Leong Finance’s NPAT for FY17, from a multi-year low of $53 million in FY16, riding on higher net interest margin (NIM) due to lower cost of funds.
“Our TP of $3.20 offers 18% upside potential, based on Hong Leong Finance’s competitive strengths and growth prospects vs its finco peers,” says Lim.
Under an M&A scenario, Lim expects Hong Leong Finance to attract at least 1x BV as current shareholders are unlikely to sell out at lower valuations given the prospects of the business under this new regulatory regime. This provides a minimum upside of more than 43% over last close of $2.70.
Shares of Hong Leong Finance are up 10 cents at $2.80.
