Hong Leong Finance Ltd Has A Nice Dividend Yield But…

Hong Leong Finance Ltd (HLF) is a financier who specialises in the provision of a wide range of financing products to retail consumers and SMEs in Singapore. As of 28 October 2019, HLF is valued at S$ 1.18 billion in market capitalisation. It is the largest non-bank financing companies in Singapore with 28 branches and as well as 12 SME Centres operating nationwide. 

In this article, I’ll highlight on its latest financial results and valuation figures. As such, here are 10 things to know about HLF before you invest.

• Asset 1: Loan Portfolio
  HLF had achieved a CAGR of 5.90% in Loan Portfolio, increasing from S$ 6.14 billion in 2009 to S$ 10.28 billion in 2018. It is attributable to a rise in its portfolio of other property loans in the 10-year period. This would include SME Property Loans and Property Development Loans. Here, I’ll provide a breakdown of its loan portfolio as of 31 December 2018:

Breakdown of Loan Portfolio	2009 Amount (S$ Million)	2018 Amount (S$ Million)	2018 Amount (%)
Housing and HDB Home Loans	1,146	1,306	13%
Other Property Loans	2,943	6,920	67%
Hire Purchase / Block Discounting	1,760	1,681	16%
Share Loans	300	257	3%
Others	91	133	1%
Total	6,240	10,297	100%

Source: HLF’s Annual Reports

• Asset 2: Singapore Government Securities (SGS)
  HLF had maintained its amount of SGS at S$ 1.2 – 1.3 billion since 2013. SGS remains as the second largest item in its asset portfolio.

Source: HLF’s Annual Reports

• Net Interest Income (NII)
  HLF’s NII had dropped from S$ 216.8 million in 2009 to S$ 137.7 million in 2016. This is because HLF has recorded a fall in interest rates from its main assets: Loan and SGS in the 7-year period. The average rate of the financier’s loan portfolio had dipped from 4.1% in 2009 to around 2.5% in 2014 while its average rate for SGS has fallen from 2.6% in 2009 to as low as 1.3% in 2015. In 2016, HLF has incurred higher cost of funding of its deposit and balances of its customers, causing it to record a low NII.
  
  Since then, HLF’s NII had improved to S$ 212.1 million in 2018 for HLF’s portfolio for the two assets had grown in terms of quantity and average rate in the 2-year period.

Source: HLF’s Annual Reports

• Non Interest Income
  HLF’s Non-Interest Income had increased from S$ 7.6 million in 2009 to S$ 15.3 million in 2018.

Source: HLF’s Annual Reports

• Profitability
  Overall, HLF has recorded a gradual decline in shareholders’ earnings to S$ 53.1 million in 2016 from S$ 111.2 million in 2009. It is due to a drop in NII as discussed above. For the last 2 years, HLF has improved its cost to income ratio (CIR) from 56.4% in 2016 to 38.7% in 2018 and kept the portfolio’s non-performing loan (NPL) ratio at about 0.7% – 0.8% for the last 2 years (securitised loans). This has contributed to a recovery in the financier’s shareholders’ earnings to S$ 118.3 million in 2018.

Source: HLF’s Annual Reports

• Latest 12-Month Financial Results
  For the past 12 months, HLF has made S$ 115.5 million in shareholders’ earnings or 25.89 Singapore Cents in earnings per share (EPS). From its EPS, HLF paid out 15.0 Singapore Cents in dividends per share (DPS) for the last 12 months.

Period	Q3 2018	Q4 2018	Q1 2019	Q2 2019	Total
Earnings	36,662	26,265	26,239	26,285	115,451
EPS (Cents)	8.23	5.89	5.88	5.89	25.89

Source: HLF’s Quarterly Reports

• Major Shareholders
  On 1 March 2019, Kwek Holdings Pte Ltd is a substantial shareholder of HLF via its interest in Hong Leong Investment Holdings Pte Ltd, which in turn, owns interests in Hong Leong Enterprises Pte Ltd and Hong Realty (Private) Ltd. Kwek Holdings Pte Ltd owns 46.17% in indirect interests in HFL. Mr. Kwek Leng Beng is the Chairman and Managing Director of the financing company. His siblings, Kwek Leng Peck and Kwek Leng Kee are non-executive directors of HFL.
  
• P/E Ratio
  As of 28 October 2019, HLF is trading at S$ 2.63 a share. Thus, based on
  its 12-Month EPS of 25.89 Singapore Cents, it has a current P/E Ratio of 10.16, which is below its 10-Year average of 13.95 (although it is best to use P/E Ratio for stocks that grow profits consistently only).
  

• P/B Ratio
  As of 30 June 2019, HLF has net assets of S$ 4.22 a share. Hence, based on its current stock price of S$ 2.63, it has a current P/B Ratio of 0.62. It is below its 10-Year average of 0.70.
  

• Dividend Yields
  For the last 12 months, HLF had paid out 15.0 sen in DPS, the highest in the 10-year period. Thus, based on its current stock price of S$ 2.63, its current dividend yield is 5.70% per year, above its 10-year average of as much as 4.45% per annum.
  

Source: HLF’s Annual Reports

VIA’s Verdict 

Overall, HLF’s stock price movements had reflected on its financial results. The financier’s stock price had fallen in tandem with its drop in earnings from 2009 to 2016. Since 2016, its stock price has not risen despite a recovery in profits in 2017 and 2018. This caused HLF’s P/E and P/B Ratio to be trading at well below its 10-year averages and offers a higher than 10-Year average in dividend yields.

Source: HLF’s Annual Reports 

Source: Google Finance

So unless you believe that the recovery in Hong Leong Finance is sustainable, those high dividend yield might turn out to be a value trap for you.

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