Wednesday, February 22, 2017

Hong Leong Financial Group : Stronger earnings from insurance business BUY

STOCK FOCUS OF THE DAY
Hong Leong Financial Group : Stronger earnings from insurance business              BUY

We maintain our BUY call on Hong Leong Financial Group (HLFG) with a higher fair value of RM17.70/share (previously RM17.60/share) based on SOP valuation. Our SOP valuation is higher after factoring in HLBB's estimated shareholders’ funds for FY18. We have rolled over our valuation period for HLBB to FY18. HLFG's 2QFY17 net profit grew strongly by 14.7%QoQ to RM513mil, contributed by an improved non-interest income (NOII). NOII surged by 38.7%QoQ, driven by higher net income from insurance business (+180.7%QoQ) and fee income (+22.8%QoQ). 6MFY17 net profit was RM829mil, rose 27.5%YoY, underpinned by higher pre-provisioning operating profit and lower provisions for loan impairment. Cumulative earnings came in within expectations, making up 54.9% of ours and 54.2% of consensus estimates for FY17 net profit.  All business segments (Commercial Banking, Investment Banking, Insurance) showed improved profit contribution to the Group's earnings in 6MFY17.

HLFG's 64.4%-owned subsidiary Hong Leong Bank (HLBB) reported a higher PBT of RM1.37bil (+30.5%YoY), driven by higher operating income, lower OPEX and provisions. HLA Holdings, the Group's insurance division, recorded a higher pre-tax profit of RM189.2mil (+44.4%YoY), contributed by lower actuarial reserve provisioning of RM24.3mil from higher interest rates (rise in MGS yield). We fine tune-our estimates and tweaked our loan growth expectation to 5.0% (previously 6.0%) while raising our NOII estimate slightly for FY17. This has lowered our net profit estimates for FY17/18/19 by 0.1%/0.5%/0.5% respectively. We continue to see the Group's insurance and investment banking business as undervalued by the market. Potential further increase in US Fed Rate will be positive on the Group's insurance earnings as actuarial reserves could further decline from higher interest rates.

Others :
Eonmetall Group : Earnings double in FY16           BUY
Automobil Sector : A few rebels breaking from the herd               NEUTRAL
Carlsberg Brewery : 4Q17 results fail to fizzle       HOLD
DiGi.Com : Ample funding for spectrum purchase and M&As      HOLD
KPJ Healthcare : Patient Attrition Remains A Concern      HOLD
Hong Leong Bank : Uptick in GIL ratio and lower contribution from Bank of Chengdu        HOLD

STOCKS ON THE  RADAR
Dufu Technology Corporation,Notion VTec,Solution Engineering,Pestech International

ECONOMIC HIGHLIGHTS
Japan : Manufacturing moving to higher gear
US : Remain optimistic

NEWS HIGHLIGHTS
Property Sector : Mercury Industries’ subsidiary to develop RM238mil project in Gombak
Bulding Materials Sector : Ann Joo returns to the black
Property Sector : UEM Sunrise to develop RM750mil project on MCOBA land

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