B T - 14 Aug 2007

UOB-Kay Hian Q2 earnings surge 64% to $80m

 

 Dividend of 9 cents per share declared, clearing all its Section 44 credits

 

By VEN SREENIVASAN

 

SINGAPORE'S biggest investment house made almost $1 million a day in profit in the three months to June 30.

UOB-Kay Hian yesterday reported a 64.7 per cent surge in second-quarter net profit to $79.7 million, which translated to earnings per share of 11 cents, versus 6.68 cents a year earlier.

Operating profit was $95.22 million, a 68.2 per cent jump from $56.6 million a year earlier.

The strong bottom line was on the back of a 76.3 per cent rise in topline revenue to $219.48 million as commission, interest, trading and corporate finance income surged.

Commission income rose a whopping 93.4 per cent to $182.19 million, while interest income surged 115.3 per cent to $24.48 million.

 

The Q2 results raised its first-half net earnings 74.3 per cent to $140.9 million, from $80.8 million a year earlier.

 

The results compared with analysts' forecast of some $150 million for the first half and surpassed the company's FY06 full-year earnings of $138 million.

 

It announced a dividend of nine cents per share less tax, effectively clearing all its Section 44 credits.

 

Its sterling results come barely two weeks after Singapore's second-biggest stockbroker, Kim Eng Holdings, unveiled a four-fold year-on-year rise in Q2 net profit to $55.1 million.

 

Kim Eng's Q2 revenue, including 'other income' of $11.9 million, surged 89.6 per cent to $155.71 million, led largely by stronger commission, trading and interest income.

 

After buying more than 10 smaller stockbrokers in the past four years, UOB-Kay Hian is by far the biggest player in town with almost 1,000 brokers - twice as many as its next biggest competitor.

 

Commanding a quarter of the market's turnover, UOB-Kay Hian's sheer size and earnings engine has prompted comparisons with the Singapore Exchange (SGX).

 

At current price levels, SGX stock is trading at a price-earnings multiple of about 35 times, while UOB-Kay Hian trades at just five times, making it the 'cheapest' billion-dollar listing here.

 

In comments accompanying its latest results, UOB-Kay Hian says it enjoyed a 'good run in the second quarter of 2007' and is confident about the future.

 

'With the markets and stock prices reaching record levels recently, investors may have concerns as to whether a correction is due and how the negative news of the sub-prime mortgage market in the US may impact the stock market,' it says.

 

'We expect long-term underlying market conditions to remain positive and are confident of managing and minimising the negative impact of any correction that may occur.

 

UOB-Kay Hian's net asset value as at end-June is 123.45 cents per share.

 

 

Despite a bull run which has sent stockmarket volumes surging in the past eight months, the shares of Singapore's largest stockbroker remained in a slumber of sorts for much of the year. It is only in the last six weeks that it has commanded some 'respect', rising some 60 per cent as some of the more savvy market players woke up to the value proposition offered by Singapore's biggest broking house.

After buying up over 10 smaller stockbrokers in the past four years, UOB Kay Hian is by far the biggest player in the market, with almost 1,000 stockbrokers - twice as many as its next biggest competitor. Commanding a quarter of the market's turnover, this is a stockbroking house with a commanding market presence.

A surge in commission, trading and corporate finance income boosted its January-March quarter earnings by 89 per cent to some $61 million. The smaller, but more regionally diversified Kim Eng enjoyed a quarterly earnings rise of 35 per cent to $38 million.

The second quarter would have been even better for both broking houses.

Trading volume on the Singapore bourse last month hit some 79 billion units, with traded value amounting to some $55 billion. For the first six months of this year, the total figure has already more than doubled year-on-year to almost 340 billion units worth some $272 billion.

It is this market rally that has boosted the shares of the Singapore Exchange (SGX). Like SGX, UOB Kay Hian is also a strong proxy for the local market.

In fact, while the SGX earns most of its money from clearing fees, Singapore's largest broking house, with its strong franchise, has a diversified stream of income ranging from stockbroking to corporate finance activities.

At current price levels, SGX's stock is trading at a price-earnings multiple of some 35 times, and a price-to-book ratio of some 16.5 times. UOB Kay Hian, on the other hand, trades at 10 times earnings, and has a price-to-book ratio of just over 2 times.

With market turnover rising another 18 per cent to $147 billion in the April-June quarter, one can safely assume that UOB Kay Hian's second quarter earnings would have been even higher than its $61 million for Q1 2007.

Full-year gain of $250m?

If analysts' forecast of some $90 million is correct, this would lift its first half bottomline to some $151 million, surpassing its FY06 full year earnings of $138 million.

All it needs is a conservative $100 million during the second half for its full year profit to hit a record $250 million. This would translate into a forward PE of about 6 times - the lowest for any billion-dollar market capitalised company.

The stock of Malaysia's leading brokerage, TA Enterprise, is trading at more than 20 times earnings.

Even if one were to impute a forward PE of 10 times on UOB Kay Hian, this would translate into a prospective price of around $4.00 on the stock - a huge upside from current levels.

But, of course, anyone contemplating investing in a brokerage has to assume that the market will remain buoyant in foreseeable future.

While past performance is no guarantee of future prospects, most indications are that - despite anticipated bouts of volatility - liquidity inflows remain intact, especially as private equity and takeover funds continue to scour the market in earnest.

Yes, UOB Kay Hian has indeed run up sharply in recent weeks.

But if one is convinced that the market still has legs, and wants to leverage on this upside, then the value proposition of investing in Singapore's dominant investment house becomes somewhat more obvious.