9M19 core net profit for RM256.6m (+24%) and absence of dividend for the quarter came within expectations. AEONCR’s earnings and growth potential are expected to maintain resilient on the back of decent asset quality. While further capital injection from its remaining ICULS could boost the group’s growth trajectory, share dilution may be seen adversely. Maintain MARKET PERFORM and TP of RM15.80.

Within expectations. 9M19 CNP of RM256.6m is within our and consensus expectations, making up 77% of both full-year estimates. The absence of dividend was also as anticipated. We expect the total dividend payment for FY19 to amount to 49.0 sen of which 22.3 sen had been declared YTD.

YoY, 9M19 total income improved by 10% to RM927.7m, thanks to higher net interest income (NII) and other operating income. Stronger NII and Net Interest Margin (NIM) at 18.9% (+6.3ppt) were likely led by higher gross financing receivables (+15% YTD, slightly above our fullyear expectations of 13%). Other income, on the other hand, grew on the back of better recovery in bad debts, better commission income from sales of insurance products and loyalty programme processing fees. Despite incurring a higher credit-charge ratio (CCR) of 5.9% (+0.9ppt) and cost-to-income ratio (CIR) of 38.5% (+3.3ppt), the group was able to register a 24% growth in core net earnings to RM256.6m, backed by lower impairment losses on financing receivables. With regards to other key metrics, non-performing loan ratios improved 3Q19 rate 2.05% (3Q18: 2.48%) explains the better asset quality for the year, further backed by better 3Q19 net credit costs of 2.08% (3Q18: 3.43%).

QoQ, 3Q19 total income declined by 2% as higher NII was offset by weaker performance from other income streams. Still, core NP for the period expanded by 8%, thanks to the same lower impairment losses on financing receivables, despite incurring a higher CIR of 42.4% (+5.8ppt).

Holding up firmly. The group continues to demonstrate steady expansion in its financing receivables base. This could be driven by effective sales and marketing strategies to expand its insurance customer base. Better cost management could progressively be seen as the company moves towards further digitalisation. 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%.

Post-results, we leave our FY19E/FY20E earnings assumptions unchanged.

Maintain MP and TP of RM15.80. Our valuation is based on an unchanged 11.0x FY20E PER (within the stock’s 3-year mean). At present, dividend offerings from the stock may not appear as the most attractive among other peers (at c.4%). Furthermore, with possible dilution on the share base, longer-term investors may shy away.

Risks to our call include: (i) faster/slower-than-expected margin squeeze, (ii) better/slower-than-expected financing receivable growth, and (iii) better/slower-than-expected improvement in asset quality.

Source: Kenanga Research - 21 Dec 2018