Monday, Aug 21, 2000
Malaysian Rating Corporation Berhad (MARC) has upgraded the long-term rating of Hong Leong Credit Berhad’s RM500 million redeemable unsecured bonds to BBB+ (triple B plus) from BBB-(triple B minus) previously.
The rating upgrade reflects the overall improvement in the economic fundamentals surrounding its major operating divisions which in turn translated into healthier financial results for the group, as well as the stronger funding and liquidity position of the group as a whole. Nonetheless, HLC’s double leverage ratio, which measures its investment in subsidiaries and associates as a percentage of shareholders’ funds, remains at above 180%.
The HLC group’s exposure to the financial sector, property and stock markets had made it vulnerable to the sharp economic downturn in 1998. In line with the rebound in economic activities, all the major operating units reported better results for FY99 except for Hong Leong Properties. Nevertheless, at the company level, a hefty sum of RM45.1 million had to be written off in conjunction with the substantial losses sustained by 29.9%-owned Perdana Merchant Bankers Berhad. The HLC Group recorded an impressive interim pre-tax profit of RM238.0 million for the half-year ended 31 December 1999, as compared to RM18.0 million recorded in the same period in FY98. Latest available figures for the nine-month period to 31 March 2000 show a profit of RM418.0 million.
Net dividend income from Hong Leong Bank (HLB) grew 40% in FY99. HLB’s credit quality has consistently been superior to the commercial banking industry as reflected by the bank’s lower net NPL ratio of 5.4% and 4.7% in FY99 and end December 1999 respectively. The moderation in the ratio in the 6-month period was due in part to the 4% growth in the net loans base. The bank’s prudent provisioning policy with regards to credit losses is expected to set the stage for a return to strong profitability levels in the medium term, particularly with the revival in production activities seen in the manufacturing sector, which is a niche sector of the bank’s lending portfolio. HLB also benefits from a stable funding base owing to the large proportion of retail deposit accounts.
The property division recorded a second consecutive year of earnings decline following weak property sales especially in the commercial subsector, low occupancy rates in its hotels and loss on disposal of investments. Recent property launches, especially those within the affordable range, have however met with good responses. Property investments, however, continued to face the risk of tenant migration and low occupancy given the oversupply of commercial and retail space in the market, which have inevitably exerted downward pressure on rentals and prices. In the near to short term, MARC does not foresee any significant improvement in this division.
In FY99, the securities arm turned around by recording a RM20.2 million pre-tax profit (FY98: RM90.8 million loss) despite the 41.3% decline in operating revenue. The turnaround was mainly attributed to a significant reduction in doubtful debt provision and interest expenses. MARC believes the present gradual upturn in the market and cheaper funding costs would lift the company’s operating income in the near-to-medium term.
Hong Leong Assurance Bhd’s (HLA) profitability continued to be driven by its non-life operations. The general division managed to record its highest contribution of RM66.6 million on the back of improved stock market valuations, which enabled gains from sale of investments as well as provisioning writebacks. The unallocated surplus from the life fund was prudently retained in the fund although the total admitted assets (based on 100% compliance) was sufficient to meet the margin of solvency requirement for the year. However, the general division’s nine-month underwriting performance was below expectation vis-à-vis the improved economic performance.
HLC’s dependence on warrant conversion as the principal source of repayment of the bonds poses some market risk, as the likelihood of the warrants being in the money is subject to the volatility and inherent unpredictability of the stock market. During the review period, HLC has replaced the original warrants with new warrants with a reduced exercise price of RM5.22. After taking into account Hong Leong Company (Malaysia)’s irrevocable undertaking to exercise its warrants entitlement for the redemption of the bonds, the amount that potentially has to be refinanced by HLC amounts to RM320 million. The refinancing risk is mitigated to a certain extent, by the unutilised portion of its approved credit lines amounting to over RM800 million.
The rating upgrade reflects the overall improvement in the economic fundamentals surrounding its major operating divisions which in turn translated into healthier financial results for the group, as well as the stronger funding and liquidity position of the group as a whole. Nonetheless, HLC’s double leverage ratio, which measures its investment in subsidiaries and associates as a percentage of shareholders’ funds, remains at above 180%.
The HLC group’s exposure to the financial sector, property and stock markets had made it vulnerable to the sharp economic downturn in 1998. In line with the rebound in economic activities, all the major operating units reported better results for FY99 except for Hong Leong Properties. Nevertheless, at the company level, a hefty sum of RM45.1 million had to be written off in conjunction with the substantial losses sustained by 29.9%-owned Perdana Merchant Bankers Berhad. The HLC Group recorded an impressive interim pre-tax profit of RM238.0 million for the half-year ended 31 December 1999, as compared to RM18.0 million recorded in the same period in FY98. Latest available figures for the nine-month period to 31 March 2000 show a profit of RM418.0 million.
Net dividend income from Hong Leong Bank (HLB) grew 40% in FY99. HLB’s credit quality has consistently been superior to the commercial banking industry as reflected by the bank’s lower net NPL ratio of 5.4% and 4.7% in FY99 and end December 1999 respectively. The moderation in the ratio in the 6-month period was due in part to the 4% growth in the net loans base. The bank’s prudent provisioning policy with regards to credit losses is expected to set the stage for a return to strong profitability levels in the medium term, particularly with the revival in production activities seen in the manufacturing sector, which is a niche sector of the bank’s lending portfolio. HLB also benefits from a stable funding base owing to the large proportion of retail deposit accounts.
The property division recorded a second consecutive year of earnings decline following weak property sales especially in the commercial subsector, low occupancy rates in its hotels and loss on disposal of investments. Recent property launches, especially those within the affordable range, have however met with good responses. Property investments, however, continued to face the risk of tenant migration and low occupancy given the oversupply of commercial and retail space in the market, which have inevitably exerted downward pressure on rentals and prices. In the near to short term, MARC does not foresee any significant improvement in this division.
In FY99, the securities arm turned around by recording a RM20.2 million pre-tax profit (FY98: RM90.8 million loss) despite the 41.3% decline in operating revenue. The turnaround was mainly attributed to a significant reduction in doubtful debt provision and interest expenses. MARC believes the present gradual upturn in the market and cheaper funding costs would lift the company’s operating income in the near-to-medium term.
Hong Leong Assurance Bhd’s (HLA) profitability continued to be driven by its non-life operations. The general division managed to record its highest contribution of RM66.6 million on the back of improved stock market valuations, which enabled gains from sale of investments as well as provisioning writebacks. The unallocated surplus from the life fund was prudently retained in the fund although the total admitted assets (based on 100% compliance) was sufficient to meet the margin of solvency requirement for the year. However, the general division’s nine-month underwriting performance was below expectation vis-à-vis the improved economic performance.
HLC’s dependence on warrant conversion as the principal source of repayment of the bonds poses some market risk, as the likelihood of the warrants being in the money is subject to the volatility and inherent unpredictability of the stock market. During the review period, HLC has replaced the original warrants with new warrants with a reduced exercise price of RM5.22. After taking into account Hong Leong Company (Malaysia)’s irrevocable undertaking to exercise its warrants entitlement for the redemption of the bonds, the amount that potentially has to be refinanced by HLC amounts to RM320 million. The refinancing risk is mitigated to a certain extent, by the unutilised portion of its approved credit lines amounting to over RM800 million.