Period

1Q16

Actual vs. Expectations

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.

Dividends

As expected, no dividends were declared. Payout is usually in 2Q and 4Q.

Key Results Highlights

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.

Outlook

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.

Change to Forecasts

Since results were in line, our forecasts were left intact.

Rating

Maintain MARKET PERFORM

Valuation

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%.

Risks to Our Call

Steeper margin squeeze.

Slower-than-expected financing receivable growth.

Worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 26 Jun 2015