We came away from a company visit feeling confident with the group’s strategies to maintain decent top-line growth through better receivables growth as well as preserving margins through asset quality enhancement. While we still like AEONCR for its resilient earnings prospects as well as decent asset quality alongside high ROE, we believe the potential dilution of full ICULS conversion could be an overhang to the share price in short term. Maintain MP with an unchanged TP of RM13.13.

Completion of Bonus Issue and Rights ICULS issuance to be listed on 21st Sept 2017. Note that the group has completed the exercise of Bonus issuance (1-for-2) as well as the renounceable rights issue of 432.0 ICULS, with 3-year minimum 3.5% coupon rate; on the basis of 2 ICULS for every 1 existing share which would raise RM432.0m cash. The conversion price for each of the Rights ICULS has been fixed at RM10.99 on 27th July 2017, with the rights ICULS to be listed on the 21st

Sept 2017. Assuming full conversion, it would result in the issuance of 39.3m shares; with potential dilution to our FY19E EPS by 15%, ceteris paribus. Note that we have yet to account this into our earnings estimates.

Net benefit to be reaped from the cash proceeds. From our recent meeting, while we are cognisant of the impact of potential dilution, we took comfort from management’s plan for the utilisation of proceeds; of which the cash could be partly used as a buffer to maintain healthy CAR (which will be above BNM’s requirement of 16%; with last quarter CAR at c.20%) in anticipation of any potential additional impairment needed from the implementation of MFRS9. Note that management has yet to ascertain the actual impact to the group until further update from the parent company. Meanwhile, we gather that the remaining funds will be used to strengthen its capital structure by paring down borrowings with the aim to secure better ratings with RAM, and thereby resulting in lower credit costs. Assuming RM155m to be utilised to pare down for banks borrowing as stated in the announcement, our net gearing assumption for FY18E and FY19E will be come down by 0.1x by each year respective.

Focus still with top-line growth and margin preservation. In terms of the group’s operation strategy, there is not much changes; with management’s main focuses staying on growing receivable growth and maintaining margins. On the group receivables, the results in 1Q18, in fact, still showed resilient growth of 17% YoY driven predominantly from Personal Financing, which we believe will continue to stay resilient on its niche small ticket market for amounts averaging at c.RM10k. Meanwhile, on the margins side, management noted that the digitalisation of branch operations is gaining traction, which we believe could continue to lead to further improvement in OpEx on a gradual basis. We expect cost-toincome ratio to maintain at 34.6%-35.1%, which is at the group’s historical 3-years range of 34%-35% despite lower interest margin, which will be offset by the better operational efficiency from digitalisation as well as stringent cost control. Meanwhile, collection ratio improvement by leveraging on the group’s stringent customer qualification processes with advanced system adoption should minimise the impact of impairment as well as keeping NPL at healthy level (of low to mid 2%). Note that we are still keeping our conservative gross loan growth of 8% each year respectively as we anticipate weaker growth ahead.

Maintain MARKET PERFORM with an unchanged ex-bonus TP of RM13.13 (10.0x FY19E PER). We made no changes to our FY18EFY19E earnings for now pending results release on the first week of October. While we still like AEONCR for its resilient earnings prospects as well as decent asset quality alongside high ROE, we believe the potential dilution of full ICULS conversion could be an overhang to the share price in short term.

Risks to our call: (i) Better-than-expected receivables growth, (ii) Better-than-expected improvement in asset quality, and (iii) Better-than-expected margin improvement.

Source: Kenanga Research - 15 Sept 2017