INVESTMENT HIGHLIGHTS

• HLFG 1HFY17 net profit within expectations.

• All business units contributed to growth in net profit.

• HLB picked up robustly on normalised or non-normalised basis due to better net interest income and non-interest income.

• Gross premium growth of HLA grew strongly at +9.2%yoy.

• Investment Banking business also grew robustly.

• No dividend declared.

• Maintain BUY on HLFG with an adjusted TP of RM17.59 (from RM17.20) based on SOP valuation.

HLFG 1HFY17 net profit within expectations. HLFG reported 1HFY17 net profit of RM829.2m, which was within ours and consensus' expectations coming in at 54.6% and 54.7% of respective full year estimates. The non-normalised and normalised (excluding MSS cost of RM172m) growth of +27.5%yoy and +12.7%yoy respectively was mainly due to strong topline growth in Hong Leong Bank (HLB) and the performance of its Insurance division.

HLB topline driven by net interest income and non-interest income. HLB topline came in higher at +8.5%yoy to RM2.28b. This was due to net interest income growth of +6.0%yoy to RM1.64b coming from improvement in net interest margin (NIM) and loans growth. NIM was higher by +10bps yoy to 2.05% due to better yield and funding cost management. Meanwhile, non-interest income grew +15.5%yoy to RM640m due to higher transactional and treasury income. Loans and deposit growth momentum was sustained as at 2QFY17, coming in at +4.6%yoy and +4.1%yoy respectively. At the same time, asset quality remains strong with gross impaired loans ratio of 0.86%.

Solid performance from Insurance division. Insurance division PBT came in +44.3%yoy higher to RM189.2m. This was due to lower actuarial reserve provisioning of RM24.3m, higher revenue of RM26.1m, lower allowance for impairment losses on securities of RM16.7m and higher share of profit from associated company of RM1.1m.

Investment Banking business under Hong Leong Cap (HLC) rebounded. The Investment Banking business under Hong Leong Cap (HLC) grew +16.3%yoy to RM39.9m. This was due to higher income from IB and stockbroking business on higher contribution from its Treasury and Markets division. Meanwhile, fund management and unit trust management recorded a higher PBT of RM4.1m (vs. 1HFY16's RM0.2m) due to higher net contribution from management fee income.

HLA’s premium growth was robust. Growth in gross premium of HLA was robust as it grew +9.2%yoy to RM1.42b.

FORECAST

No change to our forecast.

VALUATION

We continue to see value for the Group given that all its business division performed very well in 1HFY17. We are especially optimistic of the prospect of HLB given the NIM improvement, decent loans growth and good asset quality. In addition, there were healthy growth of new business premiums for HLA and it has the lowest management expense ratio of 5.6% in the industry. We maintain our BUY recommendation with a adjusted TP of RM17.59 (previously RM17.20) based on SOP valuation after adjusting our valuation for HLB based on our FY18’s estimated shareholders’ funds. Our BUY recommendation continues to be based on: i) the stable asset quality of HLB and ii) well diversified earnings of the Group

Source: MIDF Research - 22 Feb 2017