Period  4Q14/12M14

Actual vs. Expectations

 The reported 12M14 net profit of RM175.4m was above our expectations and that of the consensus, making up 112% and 109% of these earnings estimates respectively.

 Nonetheless, we saw weakness in 4Q14 with weaker growth pace in both top and bottom lines as opposed to the YoY numbers.

Dividends  Proposed/declared a final dividend of 24.0 sen, making the full-year dividend at 46.3 sen. The total dividend also represents a 38% payout which is inline with the last 2 financial years’ track records of 37.7%-38.1%.

Key Result Highlights

12M14 vs. 12M13

 YoY, total revenue or total income rose 42.1% backed by a net financing receivable growth of 51.5% and higher transaction volume of 31.4%.

 These growth numbers were reflected in the surge of 50.4% in interest income and an advance of 15.8% in other operating incomes (including fee income).

 The strong growth in net financing receivables was mainly driven by (i) Used Car Easy Payment (UCEP) and (ii) Motorcycle Easy Payment (MEP). These 2 types of financing accounted for 48.1% to total financing receivable and marked a significant increase from 40.1% of financing share in FY13. While (i) Personal Financing and (ii) Credit Card Lending grew at slower rates, their growth rates are still considered strong given a tougher operating environment as especially in 2H14. These financing receivables grew 44.4% and 18.6% YoY, respectively. Collectively, they accounted for 35.7% of the total gross receivables.

 During the financial year, we continue to see further interest margin compression. The NIM declined >100bps in FY14 based on our estimate.

 As expected, inline with high living cost and hence lower disposable income, AEONCR saw higher effective credit cost (impairment losses as a % to total receivables) and NPL ratio. Based on our estimate, the credit cost had increased by >30bps while NPL ratio jumped to 2.14% from 1.73% as at end-Feb13.

 The unfavourable trends of lower NIM and higher credit cost were mitigated by lower cost-to-income ratio (CIR). For FY14, CIR only registered at 37.6% as opposed to near 40%-mark in the past 2 years.

 As a result, net profit of the group grew at a respectable rate of 30.7%.

 However, ROE of 32.6% was slightly below the last financial year's number of 34.8% due to RM100m perpetual Notes. Recall that AEONCR has issued RM100m Perpetual Notes during the financial year, which are treated as part of the total equity.

4Q14 vs. 3Q14

 QoQ, growth pace in both top and bottom lines were weaker in contrast to the YoY growth rates.

 AEONCR’s total income and net profit only grew 7.0% and 11.1%.

 The slower top-line growth was inline with slower growth in financing receivables (+6.3% QoQ) and decline in transaction volume (-5.9% QoQ).

 The better growth in bottom-line was attributed to better CIR of 37.3% (vs. 37.7% in 3Q14) as well as lower annualised credit cost of 4.8% (vs. 5.2% in 3Q14).

Outlook  Due to a weaker consumer sentiment and higher percentage of current year receivables (of 43.0% in FY14 vs. 49.5% in FY13) and a more challenging business environment, we reckon that the growth in gross financing receivables will inevitably slow down substantially. We believe AEONCR could probably expand its financing receivables in high-teen, say 19%, in coming financial year. However, this represents a sharp decline in growth as opposed to growth of 52.2% in FY14.

 We also expect the trend of interest margin compression to continue. In fact, we have factored in an aggressive NIM squeeze of ~90bps in FY15.

 We also expect other operating incomes to decline marginally in FY15 inline with a lower total transaction growth assumption of -6% vs. 31.4% YoY growth in FY14.

 As the group has been able to demonstrate a clear-cut downtrend in CIR, we have factored in a lower CIR of ~36.7% in our forecast as opposed to ~37.6% in FY14.

 We understand that AEONCR has taken necessary measures to review credit scorecard and credit processes. As such, we could probably see lower credit cost in FY15. We have imputed a ~25bps reduction in credit cost.

 As at end-Feb14, the Capital Adequacy Ratio (CAR) of the Group is estimated at ~18%. We believe this ratio is lower as compared to the average of 25% from the financial year end of 2008 to 2012. As AEONCR had established a RM800m Perpetual Notes Programmes in FY14 with objectives to support the business expansion and to meet the capital ratio requirement, we do not rule out further utilisation of these Perpetual Notes. Based on our estimate, the Group could draw down another RM300m in Perpetual Notes in order to maintain its CAR at 25%. The implication of this move will translate into higher interest cost and lower ROE.

Change to Forecasts  Having said that we still expect AEONCR to continue its growth trajectory. After taking the afore-mentioned factors into consideration, the group is still likely to deliver strong earnings growth rates of 34.9% and 26.9% for FY15 and FY16 respectively.

 We have revised up our FY15 earnings estimate to RM236.6m (+34.9% YoY) from RM190.9m previously. We have also introduced our FY16 earnings estimate of RM300.2m (+26.9% YoY).

 As for dividend estimates, we have pegged our payout ratio at 38%, translating into DPS of 62.0 sen and 79.0 sen in the next 2 years based on our revised earnings estimates. These dividend payments will translate into dividend yield of 4.3% and 5.5% respectively.

Rating Upgrade to OUTPERFORM from MARKET PERFORM as the stock offers good upside from here.

Valuation  After taking the above-mentioned expectations into consideration, we value AEONCR at RM17.80 (an upward revision from RM17.20 previously), implying a FY15 PBV of 3.7x or a FY15 PER of 10.8x. Our valuation already factored in a potential de-rating trend in its price multiples.

 We do not rule out the PBV of the stock to gradually approach its 3-year average of ~3.5x from its historical FY13 & FY14 PBV of 4.1x and 3.8x. The de-rating in PBV multiple is inline with the lower ROE. We also reckon that a lower PER multiple, say 11.4x which is the 3-year average, is likely due to slower growth going forward.

Risks  Much slower growth in top-lines.

 Higher than expected in operating and credit costs.

Source: Kenanga