FY18 CNP came in line; so was the total DPS of 41.13 sen. We increased FY19E earnings by 6% while introducing our FY20E earnings (+10%). While we see EPS dilution assuming full ICULS conversion, the saving grace would be the cash injection supporting its resilient earnings prospects as well as decent asset quality, limiting its net EPS dilution to 9%. Maintain MP with a lower TP of RM13.40 (11.0x FY19E PER).

Within expectations. The group reported 4Q18 CNP of RM79.1m (+18% QoQ; +3% YoY), bringing FY18 CNP to RM286.4m (+14%) which made up 103%/104% of both our/consensus full-year forecasts. As expected, a final net DPS of 20.0 sen was declared, bringing total DPS to 41.13 sen.

YoY, FY18 total income grew by 11%, driven by both stronger net interest income (NII) and other operating income. Note that NII increased by 14% attributed to higher net financing receivables (+11%) while higher growth in operating income (+3%) 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 14% fuelled by lower cost-to-income ratio (CIR) of 35.3% (-0.4ppt) and lower credit-charge ratio (CCR) of 4.8% (-0.2ppts). On other key metrics, while Net Interest Margin (NIMs) continued to decline modestly to 12.3% (-0.2ppts), asset quality remained decent as non-performing loan (NPL) ratio remained stable at 2.33% (vs. 2.28% in 4Q17), helped by the marginal decline in the CCR to 4.8% (from 5.0%). Meanwhile, CAR remained healthy at c.22%.

On QoQ basis, 4Q18 total income recorded marginal growth (+2%) with higher other operating income (+11% on better bad debts recovery) masking softer NII (-1% on lower NIM). However, with lower CIR of 35.4% (-0.9ppts on better cost management), lower CCR of 4.7% (-0.4ppts on lower allowance for impairment losses) coupled with lower ETR (-4.1% to 21.9%), core NP improved by 18%.

Main focus still on growing receivables growth and maintaining margins. To date, the group is still showing decent receivables growth of 11% YoY in 2018, premised on the resilient Personal Financing demand, which we believe will continue to stay robust on its niche small ticket items with amounts averaging at c.RM10k. On the margins side, management noted that the digitalisation of branch operations is gaining traction. We expect CIR to maintain at 35.4%-35.5%, which is the group’s historical 3-year range of 34-35% despite lower NIM, which will be offset by 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 now forecasting 2-year gross loan CAGR of +11% (from +8%).

On the 3-year 3.5% ICULS, note that >80% of them have already been converted which injected RM432.0m helping the group building an adequate level of capital buffer to support continuous business growth. All in, by taking into account the full ICULS conversion alongside cash injection that supports gross loan growth, we see a 9% dilution to our FY19E EPS.

Maintain MP with a lower TP of RM13.40 from RM13.50. Post model updates, we increased FY19E earnings by 6% to account for higher gross loan growth (+12%) while introducing our FY20E earnings (+9%). With a targeted PER of 11.0x being ascribed (to reflect its latest 5-year average PER), our new TP is RM13.40. Maintain MP.

Source: Kenanga Research - 30 Apr 2018