1Q16
AEONCR’s 1Q16 net profit of RM58.2m (+4% YoY) was in line with expectations, making up 25% of both our and consensus full-year forecasts.
As expected, no dividends were declared. Payout is usually in 2Q and 4Q.
1Q16 vs. 1Q15, YoY
Tepid net profit growth of 4% due to higher allowance for impairment loss on financing receivables (+59%). This mitigated its strong income growth of 18%.
Net interest margin (NIM) fell 2ppts as average lending yield declined.
Net financing receivables continued to grow robustly at 22%.
Cost-to-income ratio (CIR) contracted 3ppts to 31% on the back of strict cost control.
Asset quality deteriorated as non-performing loan (NPL) and credit charge ratio spiked up 56bpts (to 2.74%) and 1ppts (to 6.66%) respectively.
Annualised ROE contracted 6ppts to 35%.
1Q16 vs. 4Q15, QoQ
Earnings decreased 9% as: (i) net interest income fell 8%, and (ii) allowance for impairment loss on financing receivables rose 28%.
NIM declined 2ppts on the back of lower yields.
Effective cost control saw CIR falling by 4ppts to 31%.
No improvement in asset quality. NPL ratio remained high at 2.74% (vs. 2-year average of 2.25%), while credit charge ratio increased by 1ppts.
We expect AEONCR’s financing receivable growth to taper, mirroring the anticipated slowdown in domestic consumption; post-GST implementation, consumers are likely to rein in spending for the next 2-3 quarters.
We reiterate that AEONCR’s NPL ratio is likely to hover between the range of 2.5%-3.0% (without dropping any further) given that current economic condition has not changed and should remain status quo over the near term.
Similar to sector-wide headwinds, AEONCR is poised to see narrowing NIMs due to stiff price-based competition in the market.
Since results were in line, our forecasts were left intact.
Maintain MARKET PERFORM
We keep our TP at RM14.20 based on an unchanged 8.9x FY16 P/E. To note, our valuation is slightly above its 5-year average forward P/E of 8x but is justifiable by its commendable earnings growth of 5-6% and decent yield offerings of ~4%.
Steeper margin squeeze.
Slower-than-expected financing receivable growth.
Worse-than-expected deterioration in asset quality.
Source: Kenanga Research - 26 Jun 2015
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