Maybank Research sees HLFG as cheaper proxy to Hong Leong Bank

KUALA LUMPUR: Maybank Investment Bank Research sees Hong Leong Financial Group (HLFG) as aa cheaper proxy to Hong Leong Bank and at its current price, investors would be getting its insurance business for free.

In its research note on Tuesday, it rolled forward its valuations for HL Bank (Hold) to CY19 from FY19 and raised its TP to RM17.70 from RM15.90. 

“Correspondingly, our RNAV-derived TP for HLFG is raised to RM19.90 from RM18.40,” it said. 

Maybank Research pointed out that at their current share prices, HLFG trades at a 12% discount the market cap of its 64% stake in HL Bank.

It does imply that investors would not only be gaining cheaper exposure to HL Bank, but that no value has been attached to HLFG’s life and general insurance businesses which are the fourth and third largest in the industry respectively, in terms of gross earned premiums. 

On average, the discount at which HLFG had traded to HL Bank over the past 10 years has been just about 4%. 

While the insurance business contributes to less than 10% of HLFG’s group earnings, it accounts for about 18% of Maybank Research’s RNAV value, with 70%owned HL Assurance (HLA) alone making up 10%.
 
In terms of total new business regular premiums (NBRP), HLA continues to rank fourth in terms of market share after the foreign insurers such as Great Eastern, Prudential and AIA. 

Excluding these three foreign insurers, HLA would rank as the largest domestic life insurer in the country in terms of NBRP. 

In efforts to improve profitability, HLA has (i) pushed for greater contributions from non-participating products, which typically carry higher margins.
 
To this end, HLA’s non-participating/participating ratio for new business has since improved from 22:78 in FY13 to 56:44 in FY17; and (ii) strived for improved cost efficiencies. 

HLA’s management expense ratio averaged 5.5% in FY17, ranking among the lowest in an industry where the average expense ratio is over 9%, said the research house.