9MFY20 core net profit of RM191.9m (-25%) was below expectations from higher-than-expected impairments recognition. However, no dividends were declared, as expected. Primary focus remains to be targeting the M40 customer base while balancing against difficult impairment requirements under MFRS 9. Maintain UP and TP of RM13.00 for now, pending updates from today’s briefing.

9MFY20 fell short. 9MFY20 core earnings of RM191.9m (-25%) missed both our/consensus expectations, making up 68%/65% of respective estimates. The negative deviation continues to be due to the underestimation of MFRS 9 impact towards provisions for impairment losses, being greater-than-expected. No dividend was declared, as expected.

YoY, 9MFY20 saw a higher total income of RM1.05b (+13%), mainly attributed by better net interest income (NII, +16%) on the back of larger gross financing receivables (+21%). Net interest margin, however, dipped to 12.1% (-0.5ppt) possibly from a poorer receivable mix arising from the portfolio’s growth. Overall, 9MFY20 CNP registered 25% lower at RM191.9m, dragged by higher Cost-to-Income ratio (CIR) of 39.6% (+1.1ppt), credit charge ratio (CCR) of 5.5% (+1.6ppt) and heavier impairments on receivables (+70%) due to stricter requirements from MFRS 9. On other key metrics, non-performing loan (NPL) ratio stood strong at 1.93% (3Q19: 2.05%) while net credit costs was higher at 3.91% (3Q19: 2.08%).

QoQ, 3QFY20 total income was softer by 4% from weaker NIM and other operating income (possibly from commission charges). CNP however, rose by 71% thanks to lower impairment allowances made during the quarter.

Still looks trying, on paper. The group continues to strive for a greater share within the M40 consumer space which is deemed to command higher transaction values. Such initiatives include: (i) transitioning to a B2C2B business model, (ii) promoting its e-wallet platform, and (iii) driving risk-based pricing products and specific product targeting for M40 (i.e. credit cards). Revenue factors aside, it seems like it could be a new normal for the group to be hurt by the new MFRS 9 standards. Since its implementation in 4QFY19, the earlier impairment recognition required has eroded earnings and may take the full extent of FY20 for the group to recalibrate is financing strategies. Year-to-date, while gross receivables grew by 21%, total provisions for impairment losses grew by 70%.

Post-results, we make no changes for now, pending updates from management in today’s briefing (likely with downside biased adjustments).

Maintain UNDERPERFORM and TP of RM13.00. Our TP is based on an unchanged 10.0x FY21E PER (0.5SD below the stock’s 3-year Fwd. Avg. mean) While the group may continue to grow its market share, we believe it would come at a necessary enlarged cost of credit. Additionally, the group may take some time to properly calibrate with the new accounting standards, which may leave book-seeking investors cautious.

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 - 20 Dec 2019