We came away from a recent meeting with AEONCR’s CFO/EDMr Lee Kit Seong feeling more UPBEAT on the group’s earnings prospect as we gathered that right exposure and the wellplanned strategies for its micro-financing business (small-mid ticket consumer-based financing services, which are relatively inelastic) have been helping the group to strive and stand out against the backdrop of the challenging economic outlook. Post meeting, we tweaked our FY17E-FY18E NP by 3-5% higher to account for the better net interest income growth on assumptions of stronger net financing receivables in Motorcycle Easy Payment as well as Personal financing. Apart from the resilient earnings prospects, we view that: (i) the group’s decent asset quality with Non-Performing Loans (NPL) remaining low at c.2.5%, (ii) healthy capital ratio which is at a comfortable 20% vs BNM’s capital ratio requirement of 16%, (iii) high ROE of >20% as well as (iv) a decent dividend yield of 4.9- 5.1% (based on DPR of 38%), makes it a better alternative among the NBFIs as well as the banking stocks. Meanwhile, valuation is also undemanding at a forward PER of 7.8x against the banking sector’s average forward PER of 12.4x as well as a closest peer’s forward valuation of 10.0x. Upgrade to OP with a higher TP of RM15.12 from RM13.75 (based on a targeted PER of 9.0x which is +0.5SD above its 5-year average PER).

Resiliency proven in the recent results. Recall that the group reported strong FY16 results (on 22nd April) which topped our and the consensus’ full-year forecasts by 18% and 7%, respectively, thanks to higher-than-expected transaction volumes as well as the lower-than-expected allowances for impairment losses. Meanwhile, NP grew by 6% with a stronger top line (on the back of stronger net financing receivables as well as better recovery in bad debts) offsetting the impact from higher allowance for impairment losses (+28%).

Still shining despite macroeconomic headwinds. While general perception is that the financial services providers are facing tougher times in growing their loan portfolios amid current economic condition, management demystified such the perception and noted that loan demand from its targeted customers - retail market is in fact still resilient. We gather that on top of the group’s proactive marketing efforts, the silver lining is also the business nature of AEONCR’s small-mid ticket consumer-based financing services, which are relatively less sensitive to economy headwinds. These were also translated into the group’s latest quantitative parameters with: (i) latest transaction volume which grew by 6% YoY even after GST implementation, (ii) net interest income growth of 8% YoY, (iii) financing receivables with decent growth of 19% YoY, thus leading to better asset quality with NPL at 2.47%.

Strategies to steer through choppy seas. While management expects challenging operating environment this year, it still sees underlying opportunities across its segments. On the motorcycle easy payment (lion’s share revenue contributor, at 31% in FY16), the group is targeting to expand its foothold in the superbike segment (higher income group; c.43% share currently) which is seeing growing demand. Meanwhile on the personal financing (c.20% share), the group will be more aggressive in pushing its loan lending as its stabilising NPL gives it a better freehand. On the other hand, for the Auto financing, management expects to maintain its performance level by focusing more on foreign brands. Beyond that, we believe that the group’s initiatives in setting up additional new service centres, cross selling its insurance and credit cards as well as tying up with more retail merchant will also help its top line growth. While much have been mentioned on growing its top line, management noted that it will not compromise on the asset quality as well as stretching its cost to income ratio; strategies that are lauded by us which altered our previous conservative view.

Source: Kenanga Research - 10 May 2016