Weaker 1Q12 earnings on reversion to provisions

Sharp earnings decline due mainly to general provisions. HLF reported 1Q12 net profit of S$16.7m, down 37% YoY. Whilst pre-provisioning operating profit was down a less severe 12% YoY to S$21.3m, provisions of S$1.2m (versus 1Q11’s write-back of S$7.6m) contributed to the severe earnings contraction. We cut FY12 net profit forecast by 17% to S$67.2m to reflect the 1Q12 weakness, as well as expectations of continued weakness in net interest income, as pricing for lending products remained under pressure. On a positive note, loans expanded 6.3% and deposits rose 8.2% QoQ, reflecting the balance sheet growth. We maintain our target price of S$2.42, which is pegged to 0.65x book. Neutral recommendation re-iterated.

Loans and deposits both grew strongly. Loans rose 6.3% QoQ or 22.3% YoY to S$7.92b. Deposits rose 8.2% QoQ or 14% YoY to S$8.4b. The strong deposit growth is a positive, as it 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 0.95x. With the uncertain economic environment, we do not see any catalyst driving its share price to that level. The soft pricing for lending products will also reduce investors’ interest in HLF. Our target P/B of 0.65x is a premium to the 2009 global financial crisis low of 0.5x.

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