Better lending spreads are benefitting HLF through better margins despite a contraction in loans in 1Q09. Historically, HLF’s margins have been better than its banking peers’. At the same time, we believe the various governmentinitiatives to boost lending to the SME segment, one of two core lending areas for the group, will cushion its net interest income. Collectively, we believe its net interest income should be stronger YoY.
As at the end of FY08, provisions were 74bp of gross loans, higher than the banking sector average of 69bp. This was due almost entirely to provisions for the Lehman mini-bonds structured deposits, for which the company compensated its customers. However, for FY09, we anticipate lower provisions of 58bp of gross loans, despite our assumption of a 4% NPL ratio. These are still significantly higher than the annualised figures for 1Q09.
Post 1Q09 results, we have raised our net profit estimate for 2009 (albeit to a still-conservative level, in our view) by 23% due largely to lower loan loss provision assumptions. Consequently, we have raised our target price to S$3.10 from S$2.79 (+11%).
12-month price target: S$3.10 based on a Gordon growth methodology. Catalyst: Lower-than-expected NPLs and stronger net interest income. While its share price has rebounded off the lows seen in March, we believe this stems largely from the turn in market sentiment towards a less pessimistic view. However, this has merely returned HLF’s valuations closer to their historical mean. The stock is currently trading at an FY09E P/BV of 0.8x, still below its historical mean of 0.9x. Beyond this, we believe that with reduced risk aversion, the company’s more resilient earnings, given a pure domestic exposure, should bode well for its share price. We maintain our Outperform rating.
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