1H17 CNP came in within expectations. As expected, an interim single-tier DPS of 30.5 sen was declared. No changes to our earnings estimate. We still like this name for its: (i) resilient earnings prospects on healthy gross financing receivables growth of 8-9%, (ii) decent asset quality with NPL at low 2-3%, (iii) healthy CAR of c.20%, (iv) high ROE of >20% as well as (v) decent yields of 4.4-4.6%. Moreover, valuation is still undemanding at 8.2x FY18E PER. Maintain OP with a higher TP of RM17.76 as we roll over our valuation base year to FY18E (based on 10.0x FY18E PER).

Within expectations. The group reported 1Q17 core net profit (CNP) of RM52.0m (-12% QoQ; +15% YoY), bringing its 1H17 CNP to RM111.1m (+11% YoY) which made up 46% of both our/consensus full-year forecasts. Note that the group’s 1H CNP typically made up 47-49% of full-year CNP (for the past three years). As expected, an interim single tier DPS of 30.5 sen was declared for the quarter reviewed. We are expecting the group to declare a total net DPS of 64.0 sen for FY17.

YoY, 1H17 total income grew by 14% driven by stellar performance in both net interest income and other operating income. Delving deeper, net interest income increased by 15% attributed to higher net financing receivables (+21%; driven by Credit Card: +8%, Motorcycle Easy Payment: +11%, Automobile Financing: +33% and Personal Financing: +41%) while higher growth of operating income (+11%) was due to stronger recovery in bad debts, better commission income from sale of insurance products and AEON Big loyalty programme’s processing fees. Meanwhile at the bottom line, despite higher cost-to-income ratio (CIR; of +2.7ppts to 36.1% which was due to higher OpEx for investment in new systems, employees incentives and A&P costs for anniversary celebration) coupled with the higher effective tax rate of 25.0% (+0.9ppts), CNP still improved by 11%. Looking at other key metrics, Net Interest Margin (NIM) continued to decline modestly to 13.1% (-0.7ppts) dragged by lower average lending yield (- 0.7ppts). Nonetheless, asset quality improved as non-performing loan (NPL) ratio fell by 15bps to 2.43% (as of 2Q17), amid the marginal decline in the credit charge ratio (CCR) to 5.6% (from 6.3% in 1HFY16). Annualised ROE remained healthy at 27.5% (-1.6ppts) while CAR remained at c.20%.

Meanwhile on QoQ basis, despite higher net interest income (+3%), 2Q17 CNP declined by 12% on: (i) seasonally higher allowance made for impairment losses (post Hari-Raya) coupled with (ii) higher CCR of 6.0% (+0.6ppts) for employees incentives and A&P costs spent for anniversary celebration. Still, NPL ratio remained relatively unchanged at 2.43%, which was helped by higher net financing receivables.

Still a rose among the thorns. Although most of the financial services providers are facing tougher times in growing their loan portfolios amid the current economic conditions, we understand that loan demand from AEONCR’s targeted customers – the retail market, is, in fact, still resilient thanks to its niche market exposure. We are keeping our gross financing receivables growth assumption rates of c.9% for FY17-FY18. Besides its healthy loan growth, we also like its: (i) decent asset quality with NPL expected to hover between 2-3% (on seasonality), healthy CAR, which is expected to be at a comfortable 20% vs. BNM’s CAR requirement of 16%, and (iii) higher ROE of >20% in FY17E-FY18E as well as decent dividend yields of 4.4-4.6% (based on DPR of 38%).

Maintain OUTPERFORM with a higher TP of RM17.76. While we made no changes to our earnings estimate, we roll over our valuation base year to FY18. With a higher targeted 10.0x FY18E PER (which is at +0.5SD above its 5-year mean forward PER) being ascribed, we raised our TP to RM17.76 (from RM15.12).

Risks to our call include: (i) steeper margin squeeze, (ii) slower-thanexpected financing receivable growth, and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 5 Oct 2016