By Ian Tai on April 4, 2019
Listed in 1969, Hong Leong Financial Group Berhad (HLFG) has
established itself as one of the largest integrated financial
conglomerates in Malaysia. It has three main businesses: banking,
insurance, and wealth management services. As at 2 April 2019, HLFG is
worth RM21.8 billion in market capitalization . It is among the 30
largest corporations listed on Bursa Malaysia and a constituent of the
Bursa Malaysia KLCI Index.
In this article, I’ll bring a detailed account of HLFG’s track record
over the last 10 years, and provide an update on its latest financial
results and valuation.
Here are 10 things to know about Hong Leong Financial Group before you invest:
1. HLFG derives around 89% of its profits before taxation (PBT)
from Hong Leong Bank (HBB), a 64.37%-owned subsidiary and one of the
leading banking groups in Malaysia. Over the last 10 years, HBB
has grown earnings at a compound annual growth rate (CAGR) of 12.6%,
from RM905.3 million in 2009 to RM2.64 billion in 2018. This is mainly
due to the growth in HBB’s net interest income, fee-based income, and
net profits earned from Bank of Chengdu, an 18%-owned associate bank of
HBB. Source: Hong Leong Bank annual reports2. HLFG derives about 9% of its PBT from insurers Hong Leong Assurance (HLA) and MSIG Insurance (Malaysia) Berhad.
HLFG owns 70% of HLA, the largest local life insurer in Malaysia. Over
the last 10 years, gross premiums increased by a CAGR of 13.8%, from
RM922 million in 2009 to RM2.95 billion in 2018. This is mainly due to
its agency network which contributed double-digit growth in sales of
investment-linked policies, and a strong partnership with HBB which
contributed to growth in bancassurance sales during the period. Source: HLFG investor presentation 24 August 20183. HLFG also owns 30% of MSIG, a leading general insurer in Malaysia.
Over the past 10 years, MSIG grew its profits after tax (PAT) by a CAGR
of 11.1%, from RM95.2 million in 2009 to RM243.8 million in 2018. This
is mainly due to growth in gross premiums, income from investments, and
steady underwriting margins from having a stable claims ratio over the
last 10 years. Source: HLFG investor presentation 24 August 20184. HLFG derives 2% of its PBT from Hong Leong Capital Bhd (HLCB), a 81.33%-owned subsidiary.
The company provides a wide range of investment banking services such
as stockbroking, futures broking, and unit trust management services.
Over the last six years, HLCB averaged RM75 million in PBT, providing
HLFG with a relatively stable source of income during the period. Source: HLFG investor presentation 24 August 20185. Overall, HLFG grew its revenue at a CAGR of 10.0%, from RM2.27 billion in 2009 to RM5.35 billion in 2018.
This is mainly driven by growth from HBB and HLA. The conglomerate has
maintained a cost-to-income ratio of 40-50% and a net profit margin at
30-35% for most of the 10-year period. Likewise, shareholders’ earnings
grew by a CAGR of 13.1%, from RM632.0 million in 2009 to RM1.91 billion
in 2018. HLFG saw a dip in earnings in 2016 due to a one-off mutual separation scheme expenses of RM172 million and lower profits from Bank of Chengdu that year. Source: HLFG annual reports6. Over the latest 12 months, HLFG generated RM1.94 billion in earnings and RM1.70 in earnings per share (EPS):
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Trailing 12 Months
Earnings (RM millions)
502.6
454.3
505.7
481.5
1,944.1
EPS (RM)
0.439
0.397
0.442
0.421
1.70
Source: HLFG quarterly reports
7. As at 31 December 2018, HBB had gross loans and financing assets of RM131.63 billion.
Its gross loan impaired ratio was kept low at 0.8%. Total capital ratio
was 16.6% and loan impairment coverage ratio was 122%. HBB has
maintained a position of capital strength and is well capable of
weathering a downturn in the future
Valuation
8. P/E ratio: As at 2 April 2019, HLFG is trading at
RM18.98 a share. The group generated RM1.70 in EPS over the last 12
months. Therefore, its current P/E ratio is 11.16, which is marginally
higher than its 10-year average of 10.89. 9. P/B ratio: As at 31 December 2018, HLFG reported
net assets per share of RM16.21. Therefore, its current P/B ratio is
1.17, which is lower than its 10-year average of 1.35. 10. Dividend yield: In FY2018,HLFG paid RM0.40 in
dividends per share. If HLFG maintains its dividend, its dividend yield
is 2.11%, lower than its 10-year average of 2.40%.
The fifth perspective
Since HLFG derives almost 90% of its PBT from HBB, would it make sense
to just invest directly in HBB? Let’s do a quick comparison of HLFG and
HBB’s valuations:
Hong Leong Financial Group
Hong Leong Bank
Trailing 12 months earnings
RM1.94 billion
RM2.71 billion
Trailing 12 months EPS
RM1.70
RM1.32
Share price (as at 2 April 2019)
RM18.98
RM20.06
P/E ratio
11.16
15.19
P/B ratio
1.17
1.68
Dividend yield
2.04%
2.39%
At current prices, HBB pays a better yield. But if you’re looking for
yield, there are other bank stocks in Malaysia (like Maybank and Public
Bank) that pay a higher yield. However, if you’re looking to own a piece
of HBB, investing via HLFG looks cheaper based on their respective P/E
and P/B ratios.
https://fifthperson.com/hong-leong-financial-group/
