Period

4Q15/FY15

Actual vs. Expectations

After stripping the additional 8-days financial contribution of RM8m (change of financial year end to 28 Feb), AEONCR reported FY15 net profit of RM207m (+18% YoY).

Essentially, this is in line with our and street estimates, making up 100% and 98% of respective forecasts.

Dividends

A final DPS of 29.6 sen (vs. 4Q14: 24.0 sen) was declared, bringing its full year DPS to 57.0 sen (vs. FY14: 46.3 sen). However, in terms of payout ratio, it was maintained at 38%. All in, the final DPS was within expectations.

Key Results Highlights

FY15 vs. FY14, YoY

Headline net profit surged 23%, thanks to strong income growth (+29%) as net interest income (NII) and other operating income grew 31% and 20% respectively.

That said, net interest margin (NIM) fell 17bpts due to rising cost of funds.

Net financing receivables grew by a robust clip of 27% (vs. our estimate of 18%). Main contributors are still motorcycle and car easy payments which grew 48% and makes up ~60% of total portfolio.

Cost-to-income ratio (CIR) fell 3ppts to 35% owing to strict cost controls.

Slight deterioration in asset quality as non-performing loan (NPL) ratio rose by 62bpts while credit charge ratio increased by the same magnitude as well.

Annualised ROE declined 18bpts to 34%.

Capital adequacy ratio improved 2ppts to 19%. 4Q15 vs. 3Q15, QoQ

Earnings spiked 32% as: (i) total income grew 14% while (ii) allowance for impairment losses fell 7%.

NIM improved by 1ppts on the back of higher yields.

Cost discipline intact as CIR stood at 35%.

Asset quality showed some respite as NPL and credit charge ratios contracted 31bpts by 77bpts respectively.

Outlook

In tandem with an anticipated slowdown in domestic consumption, we expect AEONCR’s financing receivable growth to taper. Studies have shown that post-GST implementation, consumers are likely to cut down on spending at least for the next 2-3 quarters before reverting to their previous expenditure pattern.

Although AEONCR’s NPL ratio fell to 2.76% in 4Q15 (from 3.07% in 3Q15), we expect it to hover between the range of 2.5%-3.0% (without dropping any further) given that current economic condition has not changed and it should remain status quo for the next few quarters.

Akin to the sector wide phenomenon, AEONCR is poised to see narrowing NIMs due to stiff price-based competition in the market.

Change to Forecasts

Post updating the full set of FY15 financial results into our model, we tone down our FY16E earnings forecast by 9% to RM231m (from RM252m). Essentially, we factored in: (i) slower financing receivable growth of 19% (from 23%) and (ii) narrower NIM of 14% (from 15%). Furthermore, we introduced our FY17E, where we expect earnings to grow by 5% to RM242m.

Rating

Downgrade to MARKET PERFORM (from OUTPERFORM)

Given recent recovery in its share price, we see little upside potential from current levels since its valuation yardsticks such as forward P/E and P/B have reverted back to their 5-year mean. Furthermore, the stock lacks re-rating catalysts.

Valuation

We now value AEONCR at RM14.20 (previously: RM12.45) based on 8.9x FY16 P/E (previously: 7x FY16 P/E). While our valuation is slightly above its 5-year average forward P/E of 8x, it is still justifiable by its commendable earnings growth of 5-6% and decent yield offerings of ~4%.

Risks to Our Call

Steeper margin squeeze from tighter lending rules and stronger-than-expected competition.

Slower-than-expected financing receivable growth.

Higher-than-expected rise in credit charge as result of a potential up-cycle in NPL.

Source: Kenanga Research - 21 Apr 2015