RESULTS

• 3QFY18 above expectations. Hong Leong Financial Group (HLFG) reported a 3QFY18 net profit of RM502.6m (+20.0 yoy, +1.4% qoq) which was 12% above our estimate, largely attributed to lower net credit cost and lumpy marked-to-market trading gains at its subsidiary - Hong Leong Bank (HLBank).

• Driven by strong growth at HLBank. The stronger-than-expected performance was largely attributed to lumpy marked-to-market gains and lower credit cost from HLBank. HLFG’s insurance division registered 79.0% yoy growth in earnings due to higher fund surplus transfer which can be volatile over the course of the year.

EARNINGS REVISION

• Following our earnings upgrade for Hong Leong Bank, we raise our FY18/19/20 earnings forecasts for HLFG by 3.7%/2.7%/2.9% respectively

RECOMMENDATION

• Maintain BUY with a higher SOP-derived target price of RM20.90. Reflecting our recent target price upgrade for HLBank, we raise our SOP-derived target price for HLFG from RM19.35 to RM20.90. Our target price imputes a 20% holding company discount, in-line with the 10-year historical mean discount to our SOP forecast. The stock is trading at a 30% discount to its SOP valuations which prompts us to maintain our BUY recommendation despite our HOLD call for HLBank, essentially implying a much cheaper proxy to HLBank. Based on HLBank’s current market capitalisation, HLFG’s stake in HLBank alone is worth RM23.40 vs current stock price of RM18.50 which implies that it is not only a cheaper proxy to HLBank but the market is not factoring any value to its insurance and investment banking assets worth RM2.73/share.

Source: UOB Kay Hian Research - 31 May 2018