Slower 2Q numbers; full year earnings revised down by 6%

Synopsis: Margins seemed to have improved over 1Q. Stock is trading at only 1.13x book and still offers an attractive dividend yield of 5%. Maintain BUY.

Interim Results Review
2Q08 earnings of S$31m were about the same as 1Q08 and that a year ago. Total group profit at half-time amounted to S$61m, 7% higher than last year. Provision writebacks in the second quarter were 23% lower compared to 1Q08 and nearly 70% lower than a year ago.

Pre-provisionings, 2Q pretax profit was only marginally higher than that of the first quarter, but 11% higher than a year ago, thanks to increased revenue from the motor portfolio acquired in third quarter last year. Although loan assets contracted 2% y-t-d, its net interest margins seems to have widened.

HLF’s loan assets grew 17% y-o-y, thanks to the boost from property loans and the recently acquired motor vehicle portfolio. Loan assets actually saw a greater 2.3% decline y-t-d, compared to nil growth registered by the industry.

Fees & commission fell by more than 30% q-o-q (27% y-o-y) to S$4.5m, as stock market sentiments were dampened by spiraling food and oil prices and the US financial woes arising from the US subprime market.

Earnings Revision
With a slower projected economic growth for Singapore in the second half, loans growth is likely to be more muted but we can expect the group to at least hold or further improve its margins as it becomes more selective in its credit review due to greater uncertainties caused by the slowing economy.

We can expect a reversal of provision writebacks, probably by 2H08, or latest in 1Q09 with the economic slowdown. We have factored a S$3m provision in 2008 and S$7m in 2009 vs a provision writeback of S$28m in FY07. Full year net profit has been reduced by 6% to S$134m (vs earlier S$143m) and 11% to S$143m in FY09.

Recommendation – Maintain BUY
At S$3.52, HLF is trading at 12x FY07 and 11x FY08 prospective earnings (fully-diluted EPS of 30c and 32c for the two respective years). Its P/B has also fallen to a more reasonable 1.13x. Even though a lower interim tax-exempt dividend of 5c was declared (vs 6c in the previous interim) and assuming a full year dividend payout of 50% vs 55% in FY07 ie only 18c instead of 20c, HLF still offers an attractive dividend yield of 5%. Maintain BUY.