FY19 core net profit of RM341.0m (+19%) is within estimates. However, we had expected more dividends than the 44.6 sen declared. AEONCR’s earnings and growth potential are expected to stay resilient on the back of decent asset quality. Ongoing operational improvements could mitigate any potential sluggishness in revenue. We make no changes for now pending further details from today’s briefing. Maintain MP and TP of RM15.80.

FY19 within. FY19 CNP of RM341.0m is within our/consensus expectations, making up 97%/99% of respective full-year estimates. A final dividend of 22.35 sen was declared, leading to a total FY19 payment of 44.6 sen. However, we deem this as below our 49.0 sen estimate, which we derived from a 5-year average historical payout ratio of 38%.

YoY, 12M19 total income rose to RM1.27b (+12%) on the back of higher net interest income (NII) and other operating income. The slightly stronger NII and Net Interest Margin (NIM) at 12.4% (+0.1ppt) could have been driven by the higher gross financing receivables (+19%, which is above our anticipated 13% growth). Other income improved from more bad debts recovered, better commission income from sales of insurance products and loyalty programme processing fees. While the group saw a lower credit-charge ratio (CCR) of 4.1% (-0.7ppt), a higher cost-to-income ratio (CIR) of 38.4% (+2.9ppt) was incurred, possibly arising from the growth in financing receivables. Still, thanks to the bigger top-line, core earnings expanded by 19% to RM341.0m. With regards to other key metrics, non-performing loan (NPL) ratio in 4Q19 was 2.04% (4Q18: 2.33%) that explained the better asset quality for the year, further backed by better 4Q19 net credit costs of 2.16% (4Q18: 3.27%).

QoQ, 4Q19 total income increased by 9%, thanks to growth in both NII and other operating income, driven by a rise in overall transactions. However, core net profit for the period only grew by 1%, following a 54% spike in impairment loss allowances on receivables.

Means for growth. Continuous expansion of the group’s receivables base could be credited to its aggressive strategies to expand its insurance and financing customer base via product diversification and cross-selling. Additionally, the capital injection following the full conversion of the ICULS exercise could fund greater financing requirements. In spite of the wider client network, asset quality could still improve with the lowering of NPL readings, indicating that stringent screening processes are still at the forefront of frontline operations. Still, expansionary results may hit a roadblock if the market appears to show signs of saturation. Regardless, earnings potential could remain intact when better operating efficiencies materialise from the group’s ongoing digitalisation.

Post-results, we leave our FY20E earnings assumptions unchanged for now, pending updates from management in today’s results briefing.

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%). Following the full dilution of the stock post-ICULS conversion, investors could potentially switch to other counters with more attractive fundamental metrics (i.e. TAKAFUL (OP, TP: RM6.50 which just released a strong set of results with high ROE of 30%)

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 - 26 Apr 2019