Hong Leong Finance

By: Derek Lim

From UOBKH

Acquiring a portfolio of hire-purchase agreements HLF has reached an agreement to acquire a portfolio of 10,300 hire purchase agreements from the Singapore branch of a foreign bank at a consideration of S$405m, subject to closing adjustments at the completion date.

The acquisition is expected to be completed on 12 Jul 07, and be funded by a combination of internal resources and short to medium term bank borrowings. Prior to this announcement, we have been forecasting Dec 07 loan book of S$7.1b. With this acquisition, we are now forecasting loan book of S$7.4b.

The acquisition will enable HLF to increase its net interest income. In FY06, HLF recorded net interest margin of 2.3%. Using the same net interest margin (which we view as conservative), a S$405m portfolio can generate additional annual net interest income of S$9.3m. For half a year (since acquisition will be completed in Jul 07), the additional net interest income accounts for 2.5% of our revised FY07 net interest income. Although the direct impact may be marginal, we believe HLF could leverage on the additional customer base to cross-sell other financial products.

Acquisition prospects remain. HLF’s NTA is S$3.24ps. Our S$5.00 price target is based on 1.6x P/NTA. We believe HLF is an attractive acquisition target by QFBs as well as China banks which want to expand their operations in Singapore. As OCBC paid 1.8x P/NTA for Keppel Capital Holdings and UOB paid 1.6x P/NTA for OUB, we feel that our price target of 1.6x P/NTA is fair. HLF also attractive due to its Section 44 tax credits which could translate to more special dividend payout.”

I got this from Channel News Asia Forum (link). I’m a UOB Kayhian customer but I have not receive such reports before – must be because I’m a small fry.

Anyway, being a HLF share-holder, I’m delighted with the news. However this might not translate in a surge in price as shown today – up by 0.5%. Their S44 credits is indeed attractive and I’m actually tempted to buy another lot today but I decided not to. Instead of giving dividends, HLF might issue rights to finance this acquisition.

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