1HFY18 CNP came in within expectations, so was the announcement of interim net DPS of 21.13 sen. We make no changes to our FY18E/FY19E earnings. 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 MARKET PERFORM with an unchanged TP of RM13.13.

Within expectations. The group reported 2Q18 CNP of RM68.2m (-6% QoQ; +31% YoY), bringing 1H CNP to RM140.4m (+26%) which made up 52%/51% of both our/consensus full-year forecasts. As expected, an interim single tier DPS of 21.13 sen was declared under the quarter reviewed. We are expecting the group to declare a total net DPS of 45.0sen for FY18 which implies a pay-out ratio of 36%.

YoY, 1HFY18 total income grew by 15% driven by stellar performances in both net interest income and other operating income. Note that net interest income increased by 17% attributed to higher net financing receivables (+16%) while higher growth of operating income (+9%) 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 26% on lower cost-to-income ratio of 34.7% (-1.4ppts) despite a slight uptick in effective tax rate (+0.5ppts to 25.5%). Looking at other key metrics, financial receivables grew by 16%. While Net Interest Margin (NIMs) continued to decline modestly to 12.9% (- 0.2ppts), asset quality remained decent as non-performing loan (NPL) ratio remained relatively unchanged at 2.48% (vs 2.43% in 2QFY17), helped by the marginal decline in the credit charge ratio (CCR) to 5.2% (from 6.0% in 1QFY17). Annualised ROE remained healthy at 28.7% (+1.2ppts).

Meanwhile on QoQ basis, 2Q18 total income recorded flat growth (+1%) with higher net interest income (+3%) offset by seasonally weaker numbers in other operating income (-6%). With seasonally higher allowance for impairment losses (+2%) recorded alongside higher operating expenses (+7%), core NP dropped by 6%.

Prospect still resilient; to be driven by decent gross loan growth alongside stable margins. In terms of the group’s operation strategy, there are not many changes; with management’s main focus staying on growing receivable growth and maintaining margins. On the group receivables, the results in 2Q18, in fact, still showed resilient growth of 16% YoY driven predominantly from Personal Financing, which we believe will continue to stay robust 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. We expect cost-to-income ratio to maintain at 34.6%-35.1%, which is at the group’s historical 3-years range of 34%-35% despite lower (NIM), 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 as we anticipate weaker growth ahead.

Maintain MP with an unchanged ex-bonus TP of RM13.13 (10.0x FY19E PER). We made no changes to our FY18E-FY19E earnings for now as our assumptions are still robust. 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.

Source: Kenanga Research - 06 Oct 2017