UOB KH on HLF

HLF 28 Feb 2006
FY05 Earnings fell 8.8%, but dividend was above expectations
HLF reported FY05 net profit of S$79.1m, down 8.8%. This is close to our
S$79.2m forecast.
Cost of funds rose sharply. Net interest income fell 9.3% to S$171m. This
was due to a sharp rise in interest payable to deposit customers which
outstripped the increases in lending rates.
Loans expanded 10.9% yoy. HDB home loans advanced in 4Q05. In
addition, the SME loan portfolio continued to expand as new relationships were
acquired. HLF is a major player in Factoring and Accounts Receivable
Financing, Trade Finance and Industrial Hire Purchase, which serves the needs
of its SME customers. For the car financing segment, HLF’s focus is
predominantly in the new cars arena. With the improving share market
sentiment, HLF created a dedicated sales team in 2005 to focus on major
potential clients. Consequently, this share lending portfolio grew 14% in 2005.
Dividend of 17¢ declared. HLF declared a final dividend of 12¢ and a second
special dividend of 5¢ per share. Including the 10¢ special dividend paid on 30
Jun 05 and the interim dividend of 6¢ paid on 4 Oct 05, the total dividend is 33¢,
or a yield of 8.7%.
Expect equally good dividends ahead. Regulations allow HLF to disburse up
to 75% of net profit as dividend. We believe HLF will aim to utilise as much of
its Section 44 tax credits as possible. Provisions written back in 1Q05 has given
HLF an opportunity to dish out 36¢ gross dividend – HLF has declared only 15¢
special dividend thus far. Hence, there is another 21¢ of special dividend that
could potentially be declared over the next few quarters. On an ongoing basis,
the 18¢ ordinary dividend pa appears to be sustainable. Hence, we forecast an
equally attractive FY06 dividend of 33¢ per share.
Acquisition prospects remain. HLF’s NTA is S$3.15ps. Our S$5.00 price
target is based on 1.6x P/NTA. We believe HLF is an attractive acquisition
target by QFBs which want to expand their operations in Singapore. As OCBC
paid 1.8x P/NTA for Keppel Capital Holdings and UOB paid 1.6x P/NTA for
OUB, we feel that our price target of 1.6x P/NTA is fair.