AEON Credit Service - 1H20 Below Expectations

Date: 27/09/2019

Source  :  KENANGA
Stock  :  AEONCR       Price Target  :  13.00      |      Price Call  :  SELL
        Last Price  :  13.00      |      Upside/Downside  :  0.00 (0.00%)

1H20 core net profit of RM121.9m (-30%) is below expectations from higher-than-expected impairments recognition. Dividends declared however, are within expectation. Steps to capture a larger M40 customer base will continue but new impairment requirements will hinder performance at least through FY20. Maintain UP with a lower TP of RM13.00 (from RM14.75) following our postresults earnings cut.

1H20 missed. 1H20 CNP of RM121.9m missed both our/consensus expectations, making up 37%/34% of respective full-year estimates. The negative deviation comes almost entirely from larger-than-expected impairment losses on financing receivables with the implementation of MFRS 9. An interim dividend of 22.25 sen was declared, which we deem to be within our full-year estimate of 45.0 sen (similar to FY19).

YoY, 1H20 total income came in at RM701.0m (+14%) thanks to higher net interest income (NII, +16%) and other operating income (+7%). Though Net Interest Margin fell slightly to 12.6% (-0.1ppt), total gross financing receivables grew favourably by 22% thanks to higher transactions across key segments (i.e. auto, motor and personal financing). However, core earnings plunged by 30% to RM121.9m on higher Cost-to-Income ratio (CIR) of 39.0% (+2.6ppt), credit charge ratio (CCR) of 6.0% (+1.7ppt) and larger impairment losses (RM248.0m, +63%). This appears to be driven by the spike in receivables arising from the early recognition of impairment required by MFRS 9. With regards to other key metrics, non-performing loan (NPL) ratio remains healthy at 2.00% (2Q19: 2.07) but saw higher net credit cost of 4.04% (2Q19: 2.19%).

QoQ, 2Q20 total income grew by 9%, possibly from higher consumer spending for the Hari Raya festivities. However, profit was sequentially lower as better NIM (+0.5ppt) was similarly offset by a rise in CIR and CCR. 2Q20 core earnings hence registered at RM40.9m (-50%).

New rules, new pressures. The group continues to strive for a greater share within the M40 consumer space which is deemed to command higher transaction values. Such initiatives include: (i) transitioning to a B2C2B business model, (ii) promoting its e-wallet platform, and (iii) driving risk-based pricing products and specific product targeting for M40 (i.e. credit cards). Revenue factors aside, it seems like it could be a new normal for the group to be hurt by the new MFRS 9 standards. Since its implementation in 4Q19, the earlier impairment recognition required has eroded earnings and may take the full extent of FY20 for the group to recalibrate is financing strategies.

Post-results, we cut our FY20E/FY21E earnings by 15.1%/11.9%, mostly from a higher annualised CCR assumption to impute higher damage from earlier impairments.

Maintain UNDERPERFORM with a lower TP of RM13.00 (from RM14.75). Our TP is based on an unchanged 10.0x FY21E PER (close to the stock’s 3-year Fwd. Avg. mean) which became lower following our earnings revision. While the group may continue to grow its market share, we believe it would come at a necessary enlarged cost of credit. Additionally, there could be fundamentally dilutive risks with an estimated balance of 49.1m units of ICULS remaining, which could expand its share base by a further 4%.

Source: Kenanga Research - 27 Sept 2019

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