Hong Leong Bhd : Compelling mid-cap exposure buy
June 29, 2011
JUNE 29 — We maintain our BUY rating on Hong Leong Bank Bhd (HLBB), with an upgraded fair value of RM15.30/share (previously RM14.70/share). This is based on an adjusted (for rights) ROE of 16.2 per cent for FY12F, leading to a fair P/BV of 2.4x. HLBB has now provided further details of the revenue synergies arising from the merger with EON Cap.The first would be the potential revenue synergies from its much stronger position in credit cards. We estimate that the merged entity’s market share will jump to 13.7 per cent, from HLBB’s current 8.2 per cent. Secondly, HLBB envisages better forex and treasury fees arising from a larger SME customer base. HLBB’s total loans from SMEs currently make up about 9 per cent of its overall total loan base, but this will rise to 14 per cent of the merged entity’s overall loans.
The other revenue synergies that have been identified are related to cross-selling and other opportunities to fill selected market gaps in terms of branch network. HLBB also intends to raise transactional and payments systems fees over a larger customer base, as well as expand its priority banking services platform.
Besides adding earnings for EON Cap, our forecasts are now adjusted for three main items. Even with these adjustments, we derive an adjusted ROE of 16.2 per cent FY12F. We believe HLBB is now positioned as a compelling mid-cap banking stock, with a meaningful exposure to China.
Key catalysts for HLBB are: (a) stronger-than-expected top line growth; (b) sustained asset quality, (c) better-than-expected contribution from Bank of Chengdu, and (c) a seamless integration of its merger with EON Cap.
* These recommendations are solely the opinion of the respective research firms and not endorsed by The Malaysian Insider. The Malaysian Insider shall not be liable for any loss arising from any investment based on any recommendation, forecast or other information contained here.
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