Period

4Q16/FY16

Actual vs. Expectations

Above expectations. The group reported 4Q16 net profit (NP) of RM68.1m (+28.0% YoY), bringing FY16 core NP to RM228.2m (+6%) which made up 118%/107% of our/consensus full-year forecasts.

The positive deviations were mainly due to: (i) higherthan- expected transaction volumes (also higher fee income), and (ii) lower-than-expected allowances for impairment losses

Dividends

Above expectations. A final dividend of 29.60 sen was declared, bringing FY16 total DPS to 59.45 sen (on 37.5% payout ratio) which implied a net dividend yield of 4.7%.

Key Results Highlights

FY16 vs. FY15, YoY

Net interest income grew by 7.7% attributed to higher net financing receivables (+19.7%) while higher growth of operating income (+31.7) was due to better recovery in bad debts, better commission income from sale of insurance products and AEON Big loyalty programme’s processing fee. As a result of stronger top line growth, NP improved by 5.8% despite higher allowance for impairment losses (+28.2%).

While net interest income is still on a growing trend, it has tapered off to a single-digit growth as compared to mid double-digit growth seen over the past few years. This was due to compressed Net Interest Margin (NIMs, -2.1ppts) dragged by lower average lending yield (-2.0ppts).

Cost-to-income ratio (CIR) contracted 110bps to 33.9% with stronger momentum in total income (+12.8%) superseding the increase in other operating expenses +9.1%).

Asset quality improved as non-performing loan (NPL) ratio fell by 29bps to 2.47%. However, credit charge ratio increased by 25bps (to 5.66%).

Annualised ROE contracted 3.7ppts to 30.7%. 4Q16 vs. 3Q16, QoQ

Earnings improved by 27.7% mainly helped by lower allowance for impairment losses (compared to high base in 3Q16 due to seasonal factor) coupled with decent growth in total income (+5.6).

NIMs remained relatively unchanged at 13.6% with stable COF at 3.92% (3Q16: 3.90%) and lending rate (at 16.98%, -6bps).

Credit charge ratio improved to 5.3% (from 6.4%).

Outlook

We believe that its NPL ratio will likely be hovering between 2.5%-3.0% due to the challenging economic condition in the near term.

Similar to sector-wide headwinds, AEONCR is poised to see narrowing NIMs due to lower rates to support financing growth.

Change to Forecasts

Post model updates, our FY17E NP has been increased by 6% to mainly account for: (i) lower credit charge ratio on lower assumption of impairment allowances as well as (ii) lower cost-to-income ratio. We also introduced our FY18E NP.

Rating

Maintain MARKET PERFORM

We expect earnings to stabilize going forward as consumers adjust to the rising costs of living.

Valuation

We raised our TP to RM13.75 (from RM12.41). This is based on a targeted 8.4x FY17E PER which is at its 5-year mean forward PER.

Risks

Steeper margin squeeze.

Slower-than-expected financing receivable growth.

Worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 22 Apr 2016