1H19 CNP came in line; so was the interim DPS of 22.25 sen. No changes made to our earnings estimates. 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. Maintain MP with a higher rollover TP of RM15.80 (11.0x FY20E PER).

Within expectations. The group reported 2Q19 CNP of RM77.5m (- 19% QoQ; +14% YoY), bringing 1H19 CNP to RM173.1m (+23%) which made up 52%/53% of our/consensus full-year estimates. As expected, an interim DPS of 22.25 sen (on 33% DPR) was declared. We expect total DPS of 46.0 sen (DPR of 38%) to be declared in FY19.

YoY, 1H19 total income grew 10%, driven by both stronger net interest income (NII) and other operating income. Note that while Net Interest Margin (NIM) continued to drop marginally to 12.7% (from 12.9%), NII improved by 7%, thanks to stronger growth in gross financing receivables (+12%). Other income improved by 23% on better recovery in bad debts, better commission income from sale of insurance products and loyalty programme processing fees. Positively, core NP improved by a wider quantum of 23% fuelled by better credit-charge ratio (CCR) of 4.3% (-0.8ppts) on lower impairment loss on financing receivables. This was due to the better collection alongside adjustment of MFRS9. On other key metrics, while NIM continued to be on the down-trend (-0.2ppts to 12.7%), asset quality remained decent as non- performing loan (NPL) ratio improved at 2.07% (vs. 2.48% in 2Q18) with the help of the better CCR (4.3%). Meanwhile, CAR remained healthy at c.22%.

On QoQ basis, 2Q19 total income grew 8% with stronger other operating income (+33%) masking flat NII (+1%). However, with higher CCR of 5.4% (+2.1ppt on seasonally higher allowance on impairment losses), core NP dropped 19%.

Still resilient. The group is still showing decent receivables growth of 12% YoY, premised on the resilient Personal Financing demand, which we believe will continue to stay robust on its niche small ticket market for amounts averaging at c.RM10k. On the margins side, the digitalisation of branch operations is gaining traction. We expect CIR to maintain at 35.4-35.5%, which is at the group’s historical 3-year 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%). We are keeping our forecasted 2-year gross loan CAGR of +11%. On the 3-year 3.5% ICULS, note that >80% of it have already been converted, which have injected RM432.0m into the group, helping to build an adequate level of capital buffer and to support continuous business growth. All in, assuming the full ICULS conversion alongside cash injection that supports its gross loan we expect FY19E/FY20E EPS growth of 12%/11% vs. CNP growth of 16%/11%.

Maintain MP with a higher rollover TP of RM15.80 from RM14.25. While we made no changes to our earnings estimates, we roll over our valuation base year to FY20E, resulting in higher TP of RM15.80. This is still based on an unchanged targeted PER of 11.0x being ascribed (on its latest 5-year average PER). Maintain MP.

Source: Kenanga Research - 05 Oct 2018