1Q20 core net profit of RM81.0m (-15%) was below expectations from higher-than-expected impairments recognised. The absence of dividend is as anticipated. We believe the group’s high exposure to the lower income segment could undermine profitability, while steps to improve profile mix may only translate towards medium-term results. Downgrade to UP with a lower TP of RM14.75 (from RM16.20) as we cut our assumptions on top of lower valuations.

1Q20 below estimates. 1Q20 CNP of RM81.0m made up 22%/21% of our/consensus expectations. We deem to be a miss owing to the higher-than-expected impairment losses on financing receivables with the implementation of MFRS 9. No dividend was declared, as expected.

YoY, 3M20 total income increased by 13% to RM334.8m from higher net interest income (NII, +11%) and other operating income (+20%). While there was a slight dip in Net Interest Margin to 12.7% (-0.1ppt), total gross financing receivables surged by 22% thanks to higher transactions across key segments (i.e. auto, motor and personal financing). However, core earnings declined by 15% to RM81.0m as 3M20 saw higher Cost-to-Income ratio (CIR) of 38.5% (+2.2ppt), credit charge ratio (CCR) of 4.7% (+2.4ppt) and larger impairment losses (RM93.3m, +64%). This appears to be driven by the spike in receivables being bogged by the early recognition of impairment required by MFRS 9. With regards to other key metrics, nonperforming loan (NPL) ratio continued to improve at 1.92% (1Q19: 2.07%) despite seeing higher net credit cost of 2.99% (1Q19: 1.70%).

QoQ, 1Q20’s total income dipped slightly (-1%) as a better NII (+4%) was offset by weaker other operating income (-14%), namely from fees. Similarly, the sequentially weaker NIM but higher CIR and CCR dragged core net profit, closing with a 4% decline in spite of a 5% growth in gross financing receivables.

Fishing for better profiles. Given that the large lower income mix (i.e. B40 consumer segment comprise of c.70% of total customers), it is likely that continuous expansion in this market could dilute asset quality and spurred the aforementioned cost ratios higher. Measures are in tow to incentivise a greater mix from the M40 consumer segment which typically commands larger transaction values. Such initiatives include: (i) transitioning to a B2C2B business model, (ii) promoting its e-wallet platform, and (iii) driving risk base pricing products and M40 specific product targeting (i.e. credit cards). Given time, we believe this could translate favourably in the medium-term for a stronger topline with better asset quality.

Post-results, we cut our FY20E/FY21E earnings by 12%/4%, mainly on more conservative cost and margins assumptions.

Downgrade to UP (from MP) with a lower TP of RM14.75 (from RM16.20). We rollover our valuation base year to FY21E, but with a lower PER of 10.0x as we re-look at our benchmarked 3-year Fwd. Avg. mean for the stock. While the group may continue to grow its market share, we believe it would come at a necessary enlarged cost of credit. Additionally, there could be fundamentally dilutive risks with an estimated balance of 49.1m units of ICULS remaining, which could expand share base by a further 4%.

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

Source: Kenanga Research - 28 Jun 2019