HLF reported FY08 net profit of S$78m, down 41.5%. The decline was primarily due to provisions for the Lehman Minibond Notes. Pre-provisioning operating profit was up 9% to S$147.9m, stronger than our S$139.8m forecast.

Net interest income rose 8.2% to S$205.6m. HLF has been cautious in its loan book – net loans contracted 7.8% to S$7.41b in FY08. Our assessment is that this cautiousness will enable HLF to minimise its asset quality deterioration in the quarters ahead.

Earnings forecast lowered to factor in deteriorating economic conditions. We expect loan loss provisioning to rise in the quarters ahead. Having said that, HLF’s conservative stance – evident from its FY08 loan contraction of 7.8% - should help to minimize the rise in NPL ratio. We lower our FY09 net profit forecast by 16% to S$91.3m primarily due to an increase in our provisioning assumption from S$12m to S$38m. We are projecting 2009 loan contraction of 2.1%.

HLF is not recommending a final dividend for FY08, in view of the difficult outlook for the year ahead. This is despite HLF’s strong Tier 1 CAR of 17%. We believe this will disappoint investors.

Valuation remains attractive. HLF is trading at a P/NTA of 0.7x (based on NTA of S$3.10/share). We maintain our S$2.65 price target, which is pegged to 0.8x of 2009 NTA. Assuming a 49% payout ratio, 2009 dividend yield is a fairly respectable 4.8%.