Higher QoQ earnings on more provision writeback

HLF reported 4Q11 net profit of S$24.7m, down 5.6% YoY, but up 11% QoQ. FY11 net profit of S$99.8m was above our S$93m forecast, due to more provisions writeback. HLF recorded a 5.2% QoQ expansion in loans, building on 3Q11’s 6.3%, which is a positive. We cut FY12 and FY13 net profit forecasts by 9% and 5% respectively to factor in weaker net interest income – management indicated that pricing for all categories of lending products continued to come under pressure. With concerns on slowing Singapore economic growth, we do not see any catalyst driving HLF share price up. Our target price of S$2.42 is pegged to 0.65x book. Maintain NEUTRAL.

Loans YoY expansion much stronger than deposit growth. Loans rose 5.2% QoQ or 18.7% YoY to S$7.45b. Deposits rose 6.0% QoQ or 8.1% YoY to S$7.76b. Although 4Q11 deposits’ growth is a positive versus 3Q11’s 2% sequential contraction, the stronger YoY loan growth versus deposits has translated to a higher loan deposit ratio. This could cap loan growth going forward.

Pre-provisioning operating profit contracted 1.5% QoQ. However, PBT was up 12% QoQ as provisions reversals doubled sequentially to S$7.1m.

Target P/B is lower than historical average. HLF trades at a historical average P/B of 0.95x. With the uncertain economic environment, we do not see any catalyst driving its share price to that level. Our target P/B of 0.65x is a premium to the 2009 global financial crisis low of 0.5x.

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