Both FY17 CNP of RM251.3m and total net DPS of 63.0 sen came within expectations. Our FY18E CNP has been tweaked up by 2% for house-keeping purposes. We still like AEONCR for its: (i) resilient earnings prospects on healthy gross financing receivables growth, (ii) decent asset quality with NPL at low 2- 3%, (iii) healthy CAR of c.19%, (iv) high ROE of >20% and (v) decent yield of c.4%. Moreover, valuation is still undemanding at 9.0x FY18E PER. Maintain OP with a higher TP of RM18.20.

Within expectations. The group reported 4Q17 core net profit (CNP) of RM76.9m (+21% QoQ; +18% YoY), widening FY17 CNP to RM251.3m (+17% YoY) which made up 104%/102% of both our/consensus full-year forecasts. As expected, a final single tier DPS of 32.5 sen was declared, bringing YTD net DPS to 63.0 sen which came close to our FY17E DPS of 64.0 sen.

YoY, FY17 total income grew by 15% driven by stellar performances in both net interest income and other operating income. On a closer look, net interest income increased by 14% attributed to higher net financing receivables mainly driven by Automobile and Personal Financing (+36% and +24%, respectively) while higher growth of operating income (+18%) 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-toincome ratio (CIR) (+1.8ppts to 35.7% which was due to higher personnel expenses and the impairment loss on investment in AEON Credit Service India amounting to RM5.2m), CNP still improved by 17%.

Looking at other key metrics, financial receivables grew by 19% vis-à-vis our conservative assumption of 9%. While Net Interest Margin (NIMs) continued to decline modestly to 12.5% (-0.7ppts) dragged by lower average lending yield (-0.65ppts), asset quality however improved as non-performing loan (NPL) ratio fell by 19bps to 2.28% (as of 4Q17), amid the marginal decline in the credit charge ratio (CCR) to 5.1% (from 5.3% in FY16). Annualised ROE remained healthy at 28.4% (-0.4ppts) while CAR remained at 19.5%.

Meanwhile on QoQ basis, 4Q17 CNP improved by 21% on lower CIR of 35.2% (-0.3ppts) as well as a lower effective tax rate of 22.3% (vs 26.2% last quarter). Besides, NPL ratio continued to improve to 2.28% (from 2.33%) which was helped by higher net financing receivables (+4%).

Against the backdrop of macroeconomic headwinds. In terms of the group’s prospect, loan demand from AEONCR’s targeted customers - retail market is, in fact, still gaining traction thanks to its niche market exposure, vis-à-vis many other financial services providers that are facing tougher times in growing their loan portfolios amid current economic condition. Post model update, our gross financing receivables growth assumption rates are at a 2-year CAGR of 7%. 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%, (iii) higher ROE of >20% in FY18E as well as decent dividend yields of c.4% (based on DPR of 37%); which are better than other NBFIs as well as most of the banking stocks. Meanwhile, the proposals for a 1-for-2 bonus issue as well as rights issuance of 432.0m ICULS on the basis of 2 ICULS for every 1 share held are expected to be completed in Sept 2017.

Maintain OUTPERFORM with a higher TP of RM18.20. Post model updates, our FY18E CNP has been tweaked up by 2%. Concurrently, our TP is raised to RM18.20 from RM17.75, with an unchanged targeted 10.0x FY18E PER.

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 - 26 Apr 2017