INVESTMENT HIGHLIGHTS

• HLFG 9MFY17 net profit was above expectations

• All business units contributed to growth in net profit

• Strong growth from HLB due to better net interest income and non-interest income

• Investment Banking business also grew robustly

• Proposed 25 sen dividend, 38 sen in total thus far

• Revising our FY17 forecast upwards by +6.9%

• Revising to NEUTRAL with an adjusted TP of RM17.64 based on SOP valuation

Earnings above expectations. HLFG’s 9MFY17 net profit came above ours and consensus' expectations at 82.2% and 82.3% of respective full year estimates. This was due to the higher than expected contribution from its associate, BOC and OPEX that came lower than expected.

Robust growth from HLB driven by net interest income and non-interest income. HLB PBT grew +13.1%yoy to RM2.07b due to the solid growth in its net interest income and non-interest income. Net interest income growth of +6.2%yoy to RM2.11b came from improvement in net interest margin (NIM) and loans growth. NIM was higher by +14bps yoy to 2.08% due to better yield and funding cost management. Meanwhile, non-interest income grew +23.9%yoy to RM1.25b due to higher trading and investment income. Loans and deposit growth momentum was sustained as at 3QFY17, coming in at +3.9%yoy and +4.2%yoy respectively. More notably was growth in its CASA of 8.8%yoy to RM38.8b, which we believe contributed to the improvement in NIM. At the same time, asset quality remains strong with gross impaired loans ratio of 0.88%.

Associate chipped in. Contribution from associate grew stronger with +24.1%yoy to RM129m in 3QFY17. We believe that this was due to BOC’s earnings normalising after the year-end (which was reflected in the 2QFY17 result) provisioning done for higher risk accounts.

Continued solid performance from Insurance division. Insurance division PBT grew +100.5%yoy to RM245.2m. This was due to lower actuarial reserve provisioning of RM77.5m, higher revenue of RM33.2m, lower allowance for impairment losses on securities of RM20.8m and higher share of profit from associated company of RM3.0m.

Solid performance from Investment Banking business under Hong Leong Cap (HLC). The Investment Banking business under Hong Leong Cap (HLC) grew +34.6%yoy to RM65.7m. This was attributable to IB and stockbroking segment recording a higher PBT by +21.7%yoy due to higher contribution from its Treasury and Markets division and Equity Markets division. Meanwhile, fund management and unit trust management recorded a higher PBT mainly due to higher net contribution from management fee income in this financial period.

FORECAST

We revised our FY17 forecast upwards by +6.9% to reflect the better performance from associates and the lower than expected OPEX.

VALUATION

The Group’s recorded a very good quarter on the back the performance of all of its divisions. We are especially optimistic of the prospect of HLB given the NIM improvement, decent loans growth and good asset quality. However, we believe that investors have fully priced in the prospect of the Group as reflected in its share price. As such, we are revising our call to NEUTRAL with an adjusted TP of RM17.64 (previously RM17.59) based on SOP valuation after adjusting our valuation for HLB based on our FY18’s estimated shareholders’ funds.

Source: MIDF Research - 30 May 2017