We came away from AEONCR’s FY19 results briefing feeling reassured of its near-term outlook. While micro-financing is expected to continue being the group’s main income stream, strategies are in place to capture a larger share from the M40 consumer segment. New channels (i.e. credit card, e-wallet, mobile app) could enable growth in this segment. Maintain MP with a slightly higher TP of RM16.20 (from RM15.80).

More transactions from perkier consumer spending. During FY19, total transactions by the group increased 32% to RM5.34b with the rise in overall financing classes (save for objective financing). Management attributed this to higher spending came from a larger mix of middle income consumers, especially for personal financing and motorcycle purchases. This then translated into higher gross financing receivables of RM8.69b (+19%). Despite larger books, the group has maintained stable collection ratios with lower non-performing loan (NPL) readings of 2.04% (from 2.33% in 4Q18), on the back on stringent processes to ensure better asset quality.

Striving for a better mix. Management guided that the current customer income group ratio of B40:M40 stands at 70:30; with the intention to lean towards a higher M40 share. We believe this is premised on a larger average transaction spend by M40 consumers while being better debtors could also improve asset quality. Efforts to tap into this market involve new credit card and risk-based pricing products. Product schemes to drive objective financing and SME financing are in the pipeline as they are currently the smaller contributors to top-line. Cross-selling across products could also boost these and key segments’ performance.

For better engagement. Previously focused on a B2B2C business model (i.e. dependent on merchants to garner customer acquisition), the group looks to build a more direct relationship with its customers by transitioning to a B2C2B model. New system and mobile application could establish a more direct point of communication, especially for promotional activities and interactive solutions. The new payment platform (i.e. AEON e-wallet) has been gaining traction by providing consumers with cashless solutions at all AEON retail outlets. With an estimated 150k users, management hopes to achieve up to 1.0m users by FY20.

Setting things in motion. Overall, we believe that the group could be well-grounded in sustaining its top-line and bottom-line performances. While AEONCR is likely to maintain its key positioning in the microfinancing space and servicing the B40 consumer segment, we concur with management’s believe that business from here could continue to be sustainable, backed by government initiatives to financially support this group. At the meantime, as the group has been steadfast in keeping solid NPL and financial ratios, we believe that a high exposure to the lower income segment may have detrimental impact in the long term.

Post-briefing, we tweak our FY20E numbers up by 2.8% on minor changes to our gross receivables mix.

Maintain MP with a higher TP of RM16.20 (from RM15.80, previously). Our valuation is based on an unchanged 11.0x FY20E PER (inline with the stock’s 3-year mean as we believe the ongoing dilution from ICULS conversion could hinder interest). With an estimated 49.1m units of ICULS remaining as of Feb’19, share base could expand by a 4% further to 264.5m shares. Investors could potentially move away to other counters with less dilutive fundamental metrics. Also at present, dividend offerings from the stock may not appear as the most attractive among peers (at c.4%).

Source: Kenanga Research - 29 Apr 2019