AFG’s FY17 net profit of RM512.1m was below our expectation (due to lower fund-based income), but within street estimates. Though FY17 operating profit improved – the key driver being NIM (+11bps yoy), the year saw a normalization in credit cost. Nonetheless, the implementation of key transformation initiatives (RM124m) should weigh on FY18-19E earnings but could have a significant impact on the group in FY20-22. Maintain BUY and PT of RM4.70.

Marginal Decline in FY17 Net Profit; Operationally Improving

AFG’s FY17 net profit of RM512.1m was down 1.9% yoy, with a weaker 4QFY17 (-9.6% yoy; -9.4% qoq) due to higher overhead qoq and a marginal decline in net income (-3% qoq) affecting the full-year earnings. Results were below our expectation but within consensus. Overall, FY17 saw 5.8% yoy growth in pre-provision operating profit, driven by an expansion in fund-based income (+4.8% yoy) as NIM continued to improve (+11bps yoy) to 2.26% (underpinned by continued expansion of the higher risk-adjusted return loanbook and a 3bps decline in funding cost). Operating expenses were flat yoy, but impaired loan allowances rose 96.5% yoy as credit cost normalized by +11.5bps yoy to 24.3bps (in the absence of a large corporate account writeback, which occurred in FY16).

Transformation Initiatives of RM124m Over FY18-19

Management has guided that it is planning to implement transformation initiatives amounting to RM94m in FY18, involving: i) scaling up its sales force by 25%; ii) technology; iii) marketing/branding; and iv) restructuring (phase 1, involving building up a more effective branch network and sales productivity). In FY19, a balance-restructuring cost of RM30m is to be rolled out. With this, management targets net profit to rebound by at least RM500m in FY19 and at least RM650m in FY20-22. The Alliance One Account (a loan-consolidation service for consumers), launched on 27 Apr 2017, is expected to draw an initial response of RM50-100m in loans. The Mobile Foreign Remittance application, targeted to be launched in 1HFY18, could capture 70,000 foreign workers to sign up in its first year – resulting in more fee income and forex gains.

Maintain BUY and Price Target of RM4.70

We maintain our BUY rating with our price target (rolled forward to CY18) unchanged at RM4.70, based on a 1.28x CY18E P/BV multiple (from 1.35x CY17E), based on a CY18E ROE of 9.7% and a 8.7% cost of equity. This is after we revise down our FY18-19 forecasts by 16.2% and 7.3% (due to the transformation initiatives). We also introduce FY20 estimates. We expect NIM at 2.2-2.24% and loan growth at 5-6% yoy in FY18-20. Risks – NIM compression, deterioration in asset quality.

Source: Affin Hwang Research - 1 Jun 2017