INVESTMENT HIGHLIGHTS

• Net profit within expectations.

• Strong showing from Commercial Banking.

• Solid performance from Insurance.

• Cost was well contained.

• No change to FY18 forecast.

• Dividend of 13 sen declared.

• Optimistic on HLB's near term prospects. We believe this has yet to be fully priced in. Upgrade call to TRADING BUY with adjusted TP of RM17.67 (from RM17.64) based on SOTP valuation.

Net profit within expectations. HLFG’s FY18 net profit came within expectations. It was 27.2% and 26.5% of ours and consensus’ full year estimates respectively.

Strong income growth was the driver for HLB. HLB PBT grew +15.7%yoy due to the solid growth in income. Net interest income grew +10.5%yoy to RM886m. This was due to improved Net Interest Margins where it rose +12bps yoy to 2.13%. This was largely contributed by effective funding cost management and prudent loan pricing. Expenses were well contained as cost to income ratio improved to 43%.

Loans growth was driven by residential mortgages and SMEs where it grew +9.9%yoy to RM58.0b and +6.5%yoy to RM20.6b respectively. Meanwhile, CASA deposit was robust. Asset quality was slight concern as gross impaired loans ratio of went up to 0.98% from 0.96% last quarter.

Insurance division saw solid performance. Insurance division PBT grew +13.1%yoy to RM60.6m. This was due lower actuarial reserves arising from higher interest rates and business growth. New business premiums within its target segment of regular premiums rose +9.2%yoy to RM139.3m. Management expense ratio was 6.7% in 1QFY18.

Investment Banking business was flat. The Investment Banking business under Hong Leong Cap (HLC) fell -0.2%yoy to RM18m.

FORECAST

No change to our FY18 estimate, but a slight tweak to our FY19 forecast.

VALUATION

We believe it was another quarter of good result for the Group. Its Commercial Banking segment under HLB had a very strong earnings growth and a solid near term prospect with its digitalisation initiative. However, we believe that the positives have been priced in for HLB. Contrastingly, it appear that there is a slight lag in pricing in HLB's good performance to HLFG's share price. As such, we believe that there is a trading opportunity. Hence, we are upgrading our call to TRADING BUY. We adjust our TP to RM17.67 (from RM17.64) due updating several components of our Sum-OfThe-Parts valuation.

Source: MIDF Research - 4 Dec 2017