Period

2Q16/1H16

Actual vs. Expectations

AEONCR’s 1H16 net profit of RM58.2m (+2.9% YoY) was in line with our expectations, making up 46%/45% of our/consensus fullyear forecasts due to higher financing.

Dividends

As expected, an interim dividend of 29.85 sen per share was declared (2Q15: 27.4 sen per share).

Key Results Highlights

1H16 vs. 1H16, YoY

Net profit growth of 2.9% was due to strong growth of both net interest income and operating income at 9.4% and 33.0%, respectively.

The strong net interest income was attributed to higher net financing receivables by 19.3% while higher growth of operating income was due to better recovery of bad debts, commission income from sale of insurance products and loyalty programme’s processing fee. This mitigated the higher allowance for impairment, which rose 36.2%.

Net interest margin (NIM) fell 2ppts as average lending yield declined by 2ppts while cost of funds declined marginally by 25bpts.

Cost-to-income ratio (CIR) contracted 1ppts to 33.4% on the back of 14.5% increase in total income vs. 11.0% increase in operating expenses.

Asset quality improves as non-performing loan (NPL) ratio fell by 7bpts to 2.58%. However, credit charge ratio spiked up by 56bpts (to 6.25%).

Annualised ROE contracted 7ppts to 29% due to distribution of Perpetual Notes, net of tax at RM3.2m. 1Q16 vs. 4Q15, QoQ

Earnings decreased by 17% as: (i) net interest income fell 4%, and (ii) operating expenses rose 8%.

NIM declined 1.2ppts on the back of lower yields.

CIR spiked by 4ppts to 35%.

Credit charge ratio improved by 64bpts to 6.13%.

Outlook

We expect AEONCR’s financing receivable growth to taper, mirroring the anticipated slowdown in domestic consumption post- GST implementation and the challenging economic conditions with consumers likely to rein in their spending.

We reiterate that AEONCR’s NPL ratio is likely to hover between the range of 2.5%-3.0% given that the 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 within expectations, 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 - 7 Oct 2015