Hong Leong Bank Bhd (Nov 30, RM10.46)
Maintain buy with unchanged fair value of RM12.15 (RM10.40): Hong Leong Bank Bhd (HLB) group is well positioned post- merger to capitalise on growth opportunities, but we believe the market may not have fully appreciated the revenue synergies that the larger organisational platform can potentially attain.
Maintain “buy” with a fair value of RM12.15, or 2.12 times FY12 price-to-book value (P/BV), based on the Gordon Growth model. This valuation is supported by 14.7% return on equity (ROE), 9.2% cost of capital and 4% long-term growth rate.
The key catalysts are: (i) a bigger than expected upside in revenue and operational synergy; (ii) more resilient than expected asset quality; and (iii) stronger than expected growth from 20% associate Bank of Chengdu in China.
The stock’s 1.6 times P/BV is compelling against ROE of 14% to 15%.
HLB’s annualised 1QFY12 earnings was largely in line with both consensus and our forecast, representing 25.8% and 25.9% of our and consensus full-year estimates.
The 1QFY12 earnings marked the first full quarter contribution from the enlarged HLB-EON Capital Bhd entity against the initial two-month contribution in 4QFY11. As a result, its quarter-on-quarter (q-o-q) earnings surged 37.2%.
EONCap’s asset quality holds firm. The key positive from the results was the lower than expected loan loss provision, which jumped 22.8% q-o-q largely due to the harmonisation of EONCap’s loan loss coverage closer to that of HLB, resulting in the merged entity’s loan loss cover enlarging from 119% in 4QFY11 to 138% in 1QFY12.
This was largely pre-emptive in nature as the asset quality of the group’s merged portfolio continued to hold up, with absolute impaired loans declining 5% q-o-q.
In fact, the actual additional impairment on EONCap’s loans book as a consequence of harmonising with HLB’s more stringent impaired loans criteria only led to a RM30.9 million increase in impaired loans for EONCap, which is small in relation to the RM673 million excess loan loss cover the group is currently sitting on.
Loans growth slowed in tandem with portfolio realignment. The group’s q-o-q loans growth was a relatively subdued 1.3%, or an annualised rate of just 5.2%.
All of its loan segments recorded lacklustre growth apart from residential and non-residential properties, which collectively grew at an annualised 17.6% year-on-year and 4.4% q-o-q. — OSK Research, Nov 30
This article appeared in The Edge Financial Daily, December 1, 2011.
Maintain buy with unchanged fair value of RM12.15 (RM10.40): Hong Leong Bank Bhd (HLB) group is well positioned post- merger to capitalise on growth opportunities, but we believe the market may not have fully appreciated the revenue synergies that the larger organisational platform can potentially attain.
Maintain “buy” with a fair value of RM12.15, or 2.12 times FY12 price-to-book value (P/BV), based on the Gordon Growth model. This valuation is supported by 14.7% return on equity (ROE), 9.2% cost of capital and 4% long-term growth rate.
The key catalysts are: (i) a bigger than expected upside in revenue and operational synergy; (ii) more resilient than expected asset quality; and (iii) stronger than expected growth from 20% associate Bank of Chengdu in China.
The stock’s 1.6 times P/BV is compelling against ROE of 14% to 15%.
HLB’s annualised 1QFY12 earnings was largely in line with both consensus and our forecast, representing 25.8% and 25.9% of our and consensus full-year estimates.
The 1QFY12 earnings marked the first full quarter contribution from the enlarged HLB-EON Capital Bhd entity against the initial two-month contribution in 4QFY11. As a result, its quarter-on-quarter (q-o-q) earnings surged 37.2%.
EONCap’s asset quality holds firm. The key positive from the results was the lower than expected loan loss provision, which jumped 22.8% q-o-q largely due to the harmonisation of EONCap’s loan loss coverage closer to that of HLB, resulting in the merged entity’s loan loss cover enlarging from 119% in 4QFY11 to 138% in 1QFY12.
This was largely pre-emptive in nature as the asset quality of the group’s merged portfolio continued to hold up, with absolute impaired loans declining 5% q-o-q.
In fact, the actual additional impairment on EONCap’s loans book as a consequence of harmonising with HLB’s more stringent impaired loans criteria only led to a RM30.9 million increase in impaired loans for EONCap, which is small in relation to the RM673 million excess loan loss cover the group is currently sitting on.
Loans growth slowed in tandem with portfolio realignment. The group’s q-o-q loans growth was a relatively subdued 1.3%, or an annualised rate of just 5.2%.
All of its loan segments recorded lacklustre growth apart from residential and non-residential properties, which collectively grew at an annualised 17.6% year-on-year and 4.4% q-o-q. — OSK Research, Nov 30
This article appeared in The Edge Financial Daily, December 1, 2011.
