1Q18 CNP came in within expectations. Absence of DPS was also expected. We tweaked our FY18E CNP by +3% and introduce our FY19E CNP (+5%). While we still like AEONCR for its resilient earnings prospects as well as decent asset quality alongside high ROE, we believe the positives have already been priced in. Other negative factors are stretched valuation and potential dilution of full ICULS conversion. Downgrade to MP despite higher roll-over TP of RM19.70.

Within expectations. The group reported 1Q18 core net profit (CNP) of RM72.2m (-6% QoQ; +22% YoY) which made up 28%/26% of both our/consensus full-year forecasts. As expected, no dividend was declared under the quarter reviewed.

YoY, 1Q18 total income grew by 15% driven by stellar performance in net interest income and other operating income. Note that the lion’s share contributor- net interest income increased by 16% attributed to higher net financing receivables (+17%) while higher growth of operating income (+11%) was driven mainly by stronger recovery in bad debts, better commission income from sale of insurance products and AEON Big loyalty programme processing fees. Meanwhile, core NP improved by a wider quantum of 22% on a lower cost-to-income ratio of 33.6% (-2.3ppts) despite a slight uptick in the effective tax rate (+0.2ppts to 25.6%). Looking at other key metrics, financial receivables grew by 17%. While Net Interest Margin (NIMs) continued to decline modestly to 13.2% (- 0.4ppts), asset quality remained decent as non-performing loan (NPL) ratio remained relatively unchanged at 2.43% (vs 2.42% in 1Q16), helped by the marginal decline in the credit charge ratio (CCR) to 5.2% (from 5.4% in 1Q17). Annualised ROE remained healthy at 31.1% (+0.6ppts) while CAR remained at 20.0%.

Meanwhile, on QoQ basis, 1Q18 total income recorded flat growth with higher net interest income (+4%) offset by seasonally weaker numbers in other operating income (-11%). With higher allowance for impairment losses recorded alongside higher effective tax rate (+3.3ppts to 25.6%), core NP dropped by 6%.

Prospect still resilient, but positives could have been priced in. Loan demand from AEONCR’s targeted customers - retail market is still resilient 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 softer economic condition. Since our OUTPERFORM recommendation in May 2016, the share price has advanced by 46%; with its forward PER trading at 10.1x which is at +1.0SD above its 3-year average PER. While we still like the group for its resilient earnings prospects as well as its decent asset quality alongside high ROE, we believe the positives have already been priced in. Moreover, on the cash call exercise prior the implementation of MFRS9 (right issuance of ICULS for cash of RM432.0m, on the basis of 2 ICULS for every 1 share held), assuming the full conversion of ICULS (over 3-year period) at conversion price of RM10.75 which is based on an assumed 15% discount to TEAP of RM12.50 (with the base case of completion of the Bonus issue), the potential dilution to our FY18E EPS could be at c.16% which we have yet to account into our earnings estimates. Meanwhile for the bonus issuance, the group has announced the ex-date (14th July 2017) and the entitlement date (18th July 2017) for its 1-for-2 bonus issue.

Downgrade to MP despite a higher roll-over TP of RM19.70 (10.0x FY19E PER) from RM18.20. Our FY18E CNP has been tweaked up by 3%. We have also introduced our FY19E earnings with CNP growth assumption of 5% premised on the healthy gross financing receivables growth assumption of 7%. While we roll over our valuation base year to FY19 with a higher TP of RM19.70, we downgrade the stock to MP in view of its stretched valuation, potential dilution from the full ICULS conversion as well as the uncertainty from the MFRS9 implementation.

Source: Kenanga Research - 5 Jul 2017