9MFY18 CNP came in within expectations, so was the absence of DPS. Post model updates, our FY18E/FY19E earnings have been tweaked by +2%/+3% for house-keeping purposes. 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 form an overhang to the share price in the short term. Maintain MARKET PERFORM with a higher TP of RM13.50.

Within expectations. The group reported 3Q18 CNP of RM67.0m (-2% QoQ; +6% YoY), bringing 9M CNP to RM207.4m (+19%) which made up 77%/75% of both our/consensus full-year forecasts. As expected, no dividend was declared. We are expecting the group to declare a total net DPS of 45.0sen for FY18, implying a payout ratio of 36%.

YoY, 9MFY18 total income grew by 13% driven by stellar performances in both net interest income and other operating income. Note that net interest income increased by 16% attributed to higher net financing receivables (+13%) while higher growth of operating income (+6%) was mainly driven by stronger recovery in bad debts, better commission income from sale of insurance products and AEON Big loyalty programme’s processing fees. Meanwhile, core NP improved by a wider quantum of 19% on lower cost-to-income ratio of 35.2% (-0.7ppt) despite a slight uptick in the effective tax rate (ETR, +0.3ppts to 25.7%).

Looking at other key metrics, while Net Interest Margin (NIMs) continued to decline modestly to 12.6% (-0.2ppts), asset quality remained decent as non-performing loan (NPL) ratio remained stable at 2.48% (vs 2.33% in 3QFY17), helped by the marginal decline in the credit charge ratio (CCR) to 5.1% (from 5.2% in 3QFY17). Meanwhile, CAR remained healthy at c.24%.

On QoQ basis, 3Q18 total income recorded marginal growth (+2%) with moderate growth in net interest income (2%) and other operating income (+3%). With higher cost-to-income ratio of 36.3% (+0.6ppts) on higher other operating expenses (4%) as well as slight uptick in ETR (+0.5% to 26.0%), core NP marginally declined by 2%.

Prospect still resilient; to be driven by decent gross loan growth alongside stable margins. In terms of the group’s operation strategy, there are only few changes; with management’s main focuses staying on growing receivable growth and maintaining margins. On the group receivables, the results in 3Q18, in fact, still showed decent growth of 13% 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%- 35.0%, 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 a healthy level (of low to mid 2%). Note that we are still keeping our conservative gross loan growth forecast of 8% annually as we anticipate softer growth ahead.

Maintain MP with a higher TP of RM13.50 (10.0x FY19E PER). Post model updates, our FY18E/FY19E earnings have been tweaked by +2%/+3% for house-keeping purposes. 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 create an overhang to the share price in short term.

Source: Kenanga Research - 22 Dec 2017