HLF reported 1Q09 net profit of S$25.7m, down 15.8% YoY, in line with our expectations. The decline was primarily due to 1Q09 allowances of S$4.8m, versus 1Q08’s recovery of S$2.5m. Pre-provisioning operating profit, which is a better measure of core earnings, was up 5.3% YoY to S$36.7m.

Net interest income rose 10.5% YoY to S$53.1m. HLF has been cautious in its loan book – net loans contracted 3.7% YTD to S$7.1b, after the 7.8% YoY contraction in FY08. Our assessment is that this cautiousness will enable HLF to minimise its asset quality deterioration in the quarters ahead. We are forecasting a 2009 loan contraction of 5.4%.

Our high FY09 provisions is due to the deteriorating economic conditions. We expect loan loss provisioning to rise in the quarters ahead. Having said that, HLF’s conservative stance – evident from its loan contraction - should help to minimize the rise in NPL ratio. We are assuming FY09 net profit provisions of S$38m. This is higher than the estimated S$10m for FY08 – though overall provisions was S$55m, a significant S$45m was due to the Lehman Minibond Notes, which is one-time.

Valuation remains attractive. We lowered FY09 net profit by 3% to S$88.8m. HLF is trading at a P/NTA of 0.6x (based on NTA of S$3.16/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%.