By: Derek Lim

The Business Times
Published October 19, 2007

HLF: Firing on all pistons, no CDO shock
By SIOW LI SEN

WHEN Hong Leong Finance (HLF) posts its third-quarter results next month, it is likely to announce a special dividend to use up its tax credits before they expire at year’s end.

Singapore’s largest independent finance company is also expected to report good results, driven by strong loans growth and burgeoning fee income – and with no risky collateralised debt obligation (CDO) exposures to take the shine off its numbers.

Among big companies, HLF is one of a few to have unused tax credits left before they expire on Dec 31.

These credits – a legacy from the previous tax system – are a boon especially for retiree shareholders as many can claim a tax refund when dividends are paid to them by companies with these tax credits in hand.

Ng Wee Siang, a BNP Paribas analyst, said this week that HLF is believed to have unutilised tax credits of at least $100 million or 23 cents per share, translating into a potential net dividend yield of 5.9 per cent.

In a July 2005 interview with BT, HLF president Ian MacDonald said the company had more than sufficient tax credits left for a 75 per cent payout of profit for the next two years, which it did for its 2004 earnings.

In a statement earlier this year, HLF chairman Kwek Leng Beng said the use of its remaining tax credits would be considered in any future dividend payout. ‘In deciding on the quantum of the distributions, the company aims to balance prudential considerations with the utilisation of Section 44 tax credit balance where possible before the cut-off date,’ he said.

The company paid a special dividend of nine cents for 2006 and 15 cents in 2005.
HLF, with 28 branches islandwide, is on course to report strong Q3 results fuelled by a surging Singapore economy, and the benefits from efforts to expand its fee income business.

In addition, the third quarter will have a new source of net interest income from an acquisition in June. In that deal, it bought ABN Amro Bank’s car loan portfolio for $405 million, boosting its total loan book by about 6.2 per cent.
The ABN Amro purchase augments the finance company’s position as a major car-financing player here.

Fee income should continue to post a big jump as the company expands its range of services to its traditional small and medium-enterprise (SME) base, and sell more investment products to its niche heartlander customers.

In May, HLF launched a business current account for SMEs, becoming one of the few finance companies in the world to offer cheque-book facilities after the regulator gave it more leeway in providing financial services.

For the first half of 2007, net profit rose some 30 per cent to $57.7 million with a smart pick-up in fee income which jumped 177 per cent to $11.1 million.
The company also said in August when it announced its first-half numbers that it has no holdings of CDOs and/or asset-backed securities.

Many analysts expect the Q3 results of the three local banks – DBS, United Overseas Bank and OCBC Bank – to be clouded by some CDO-related losses.

HLF is often ignored by the bigger broking houses as its share market liquidity is deemed too low for their global clients. Its market capitalisation was $1.7 billion at yesterday’s closing price of $3.88, which is about 9 per cent lower than the year’s high of $4.26.

Still, because of its small size relative to the banks, HLF has merger and acquisition potential and some think its majority shareholders, the Kweks, are fully aware of this.

I have highlighted the important points in bold. Base on the target dividend of $0.23/ share, HL Finance should easily surge past the $4 mark but as past experience has taught me, I will not see a sudden spike in price but rather a gradual one because as mention in the article, liquidity is too low. Nevertheless, I will be keeping HL finance in my long term portfolio and will buy more if the market goes into a recession.