Towards Financial Freedom
HLF - Net interest income still on YoY downtrend
Earnings decline attributed to loan provisions. HLF reported 3Q12 net profit of S$17m, down 24% YoY. This represents 28% of our 2012F. The sharp decline is largely due to provisions of S$3.3m, a reversal from 3Q11's S$3.6m writeback. Another contributor to weak earnings was the 4% YoY decline in net interest income. However, fee & commission income rose 56% YoY (thought the absolute amount is small) and staff costs fell 5% YoY. We raise 2012F & 2013F net profit by a marginal 4% and 7% respectively. Maintain NEUTRAL with a slightly higher target price of S$2.43, pegged to 0.65x 2013 book.
Net interest income weakness offset by fee & commission strength. Operating profit before provisions was up a marginal 1% YoY. Whilst net interest income fell 4% (or S$1.6m) YoY, it was up 4% QoQ. Loans rose 24% YoY and 5% QoQ, reflecting HLF's loan aggressiveness. However, pricing for lending products remained under pressure. Fee & commission income was the star performer, rising 56% (or S$1.4m) YoY, and almost offset the net interest income decline.
Four consecutive quarters of loan deposit ratio decline, as deposits outgrew loans. Deposit grew 32% YoY and 8% QoQ. This led to loan deposit ratio falling to 90.5%, from 93.3% in Jun 12. We view this positively as the strong deposit growth provides scope for further loan expansion going forward.
Target P/B is between historical average and crisis low. HLF trades at a historical average P/B of 0.94x. The soft lending yields and the uncertain economic environment will keep its share price below this historical average. Our target P/B of 0.65x is a premium to the 2009 global financial crisis low of 0.5x.
Source: OSK
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