Period

3Q16/9M16

Actual vs. Expectations

AEONCR’s 9M16 core net profit of RM149.7m (+3.0% YoY) was below our/market expectations, making up 65%/68% of our/consensus full-year forecasts due to higher allowances for impairment losses.

Dividends

As expected, no dividend was declared.

Key Results Highlights

9M16 vs. 9M15, YoY

Net profit declined by 1.5% due to higher impairment losses (+32.0%) and opex (+12.1%) despite total income growth of +14.8%.

Net interest income grew at 9.9% (3Q15: +31.2%) attributed to higher net financing receivables 18.3% (3Q15: +29.6%) while higher growth of operating income (+32.8) was due to better recovery of bad debts, commission income from sale of insurance products and loyalty programme’s processing fee.

The single-digit growth of net interest income was dragged by Net interest margin (NIMs) falling by 1.8ppts as average lending rate (ALR) declined by 1.9ppts while cost of funds (COF) declined marginally by 27bpts.

Cost-to-income ratio (CIR) contracted 85bps to 33.8% on the back of 14.8% increase in total income vs. 12.1% increase in operating expenses.

Asset quality improved as non-performing loan (NPL) ratio fell by 39bps to 2.68%. However, credit charge ratio spiked up by 50bps (to 6.13%).

Annualised ROE contracted 6.4ppts to 27.8% due to distribution of Perpetual Notes, net of tax at RM10.4m. 3Q16 vs. 2Q16, QoQ

Earnings improved by 9.8% as: (i) total income rebounded to +8.2% (2Q16: -4.5%) on the back of slower opex at +6.1% (2Q16: +7.5%).

NIMs improved by 24bps on the back of lower COF at 3.9% (2Q16: 4.0) against higher lending rate of 17.04% (2Q16: 16.9%).

Credit charge ratio exacerbated by 28bps to 6.41%.

Outlook

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

We reiterate its NPL ratio is likely to hover between 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 lower rates to support financing growth.

We revised our assumptions where: (i) NIMs at 13.7% for both FY16/FY17 (previously at 13.9%/13.4%), (ii) credit charge at 6.15%/6.00% for FY16/FY17 (previously 5.4%/5.5% for FY16/FY17), and (iii) financing growth at 19% for FY16/FY17 (previously at 19.2%/17.3% for FY16/FY17).

Change to Forecasts

Since the results were not up to expectations we trimmed our forecasts for FY16/FY17 by -16%/-8% to RM193.2m/RM221.9m.

Rating

Maintain MARKET PERFORM

A subdued economy and but nevertheless growing, we expect earnings to stabilize going forward as consumers adjust to the rising costs of living.

Valuation

We reduced our TP to RM12.41 (from RM14.20) based on a 9.2x FY16 P/E @+0.5SD.

Our valuation is slightly above its 5-year average forward P/E of 8x but justifiable by its decent yield offerings of ~5%.

Risks

Steeper margin squeeze.

Slower-than-expected financing receivable growth.

Worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 23 Dec 2015