Pre-provision writeback, operating profit was up 23%, 10% above our expectationsSYNOPSIS: HLF’s margins should benefit from the falling interbank rates. Stock is trading at only 1.17X P/B with an attractive dividend yield of 5.4% (excluding special dividend). Upgrade to BUY.

FY07 RESULTS REVIEW

HLF reported a strong 20% growth in operating income and 23% growth in operating profit, 10% above our expectations. Operating profit for full year was S$135m, with 4Q registering a 5% improvement over 3Q. Net profit for the group rose by a higher 39% due to provisionings writeback amounting to S$27.6m. A further S$8m provision was written back in the 4th quarter. A final dividend of 8c was declared, bringing total dividends payout for the whole year to 26c (inclusive of 6c special dividends paid in 3Q).

NET INTEREST INCOME GREW 14% Y-O-Y

Net interest income rose 14% y-o-y to S$190m on the back of a 39% expansion in loan asset base. Excluding the S$405m car portfolio acquired in 3Q07, HLF’s loan base would have expanded by 29%, in line with industry’s 28% growth. FEE INCOME DOUBLED Fees & commission more than doubled, from S$9m a year ago to S$22m in 2007. Fees are generated from corporate finance, bancassurance and wealth management activities.

COST-TO-INCOME RATIO FELL TO 36%

Cost-to-income ratio of HLF fell from 41% to 36% in 2007, as cost increases rose slower than revenue growth.

PROSPECTS

With the two integrated resorts into the construction phase, there will be high demand for HLF’s equipment financing and cashflow financing businesses in the capital intensive industries. HLF plans to expand its range of insurance and annuity products to increase fee income from wealth management, a new area which the group was allowed to move into only in 2H06. Response to these products from the heartlanders, where HLF has a strong niche in, has been good and is likely to remain strong as depositors seek alternative investments to replace their deposits which are yielding negative real returns under current inflationary climate.

EARNINGS FORECASTS

We are projecting earnings growth to slow, in the absence of further provision writebacks, to 7% in 2008 to S$143m and 13% growth to S$161m for 2009.

CONCLUSION & RECOMMENDATION – UPGRADE TO BUY

At S$3.70, HLF offers an attractive dividend yield of 5%, even if we exclude the special dividend. It is now trading at 12X FY08 and 10X FY09 prospective earnings (fully-diluted EPS of 31.7c and 35.8c for the two respective years). It is trading at only 1.17X P/B. With no CDO exposure, HLF would also appear to be a safer bet on the domestic growth story than the banks for now.

[This article is contributed by NRA Capital Pte. Ltd., a licensed Financial Adviser by the MAS. Readers of this content are bound by the same terms & conditions of our website www.netresearch-asia. com .]