KEY INVESTMENT HIGHLIGHTS

• Above ours and consensus’ expectations

• HLB saw strong performance supported by robust PPOP growth

• HLC and HLA played commendable supporting role

• Situation improving

• Tweaking earnings FY21 and FY22 forecast upwards by +8.9% and +9.0%

• Upgrade to BUY with revised TP of RM18.00

Above expectations. HLFG 1QFY21 net profit of RM587.0b was above our and consensus’ expectations. It came at 32.9% and 30.2% of respective full year estimates. The variance was due to our underestimation of Hong Leong Capital’s (HLC) performance. HLFG’s 1QFY21 earnings growth of +19.8%yoy was driven by performance in Hong Leong Bank (HLB) and HLC.

HLB earnings was supported by PPOP growth. The main drivers for HLB earnings growth were higher net income and lower OPEX. Net income grew +11.0%yoy as NII rebounded strongly to increase by +12.5%yoy. The strong expansion in NII was due to recovery in NIM as it expanded +38bps qoq to 2.0% on lower funding cost following repricing of fixed deposits (FD) after the OPR cuts. Meanwhile, NOII provided support with its +7.0%yoy growth.

The strong PPOP growth was moderated by higher provisions which came in at RM105m. However, we are not concern by the elevated provisions as it was to build strong buffers in light of possible deterioration in asset quality following from resurgence in the Covid-19 new cases in Malaysia. LLC excluding regulatory reserve to 190%.

Gross loans growth traction maintained with +6.8%yoy to RM148.1b (vs. +6.1%yoy to RM145.9b as at 4QFY20). Main contributors were mortgages which expanded +8.0%yoy to RM74.5b and domestic business enterprises which rose +8.4%yoy to RM43.3b.

The sturdy gross loans growth was matched by robust deposits growth as it grew +6.8%yoy to RM174.7b (vs. +6.4%yoy to RM173.5b as at 4QFY20). This was led by CASA whereby it grew +21.0%yoy to RM50.6b outpacing FD growth of +6.8%yoy to RM96.6b.

Post loan moratorium period looking stable so far with HLB’s Payment Relief Assistance Plans (PRAP) amounted to RM11.8b or 8.0% of total gross loans base as at 16 November 2020. We do not expect that all of its borrowers under the PRAP will turn non-performing. However, we recognize that with the Conditional Movement Control Order (CMCO) reimposed that some of these borrowers (especially from businesses) may face further pressure. Nevertheless, with the build-up of buffers, we expect HLB to able to weather any stress to its asset quality.

Better results in insurance division. Insurance division (HLAH) segmental 1QFY21 PBT expanded +6.5%yoy to RM61.6m. The increase was mainly due to higher revenue of RM18.0m whereby RM14.1m was due to unrealised gain on revaluation of equities. It was also due to higher share of profit from associated company of RM8.1m. Meanwhile, momentum in gross premiums and new business regular premiums (NBRP) continues. For 1QFY21, its gross premiums increased +15.4%yoy to RM718.4mn while NBRP grew +54.9%yoy to RM194.5m. Its management expense ratio was 6.0% in 1QFY21, remaining among the lowest in the industry.

Strong performance of its Investment Banking. HLC recorded 1QFY21 PBT grew +115%yoy to RM52.7m. This was due to strong performance of its stockbroking division, unsurprising given the performance of the stock market. Also, there was higher contribution from investment banking.

Tweak to earnings forecast. We are tweaking our FY21/FY22 earnings forecast upwards by +8.8%/+9.0% to take into account better than expected HLC performance.

Valuation and recommendation. We were pleasantly surprised by the pace of improvement to HLFG’s performance. We believe the main driver for Group's performance continues to be HLB and its performance was steady despite the tough operating environment. Furthermore, the other divisions also played a commendable supporting role. With the situation expected to improve next year from a GDP perspective and health perspective (following positive vaccine development), we are upgrading our call to BUY (from TRADING BUY). We revised our TP to RM18.00 (from RM14.10) as we revised the TP for HLB as we rollover our valuation to FY22 and accorded a higher PBV. Our TP is based on SOTP valuation.

Source: MIDF Research - 30 Nov 2020