Spreading wider… In the recent 9MFY20 period, total transactions rose to RM4.60b (+21% YoY) as most financing classes (except personal financing) saw a greater uptake, which could be due to the group’s efforts to increase its M40 customer base. Gross receivables in turn came in at RM10.03b (+21% YoY), as of 3QFY20. Meanwhile, collection ratios have also shown improvement with current collection (not past due) rates clocking in at 98.0% (3QFY19: 97.6%) and non- performing loans (NPL) of 1.93% (3QFY19: 2.05%). This could be attributed by effective processes in place to ensure asset quality.

…but hurt by MFRS 9. In adopting MFRS 9 which demands an early recognition of receivables impairment, the group saw its 9MFY20 provision surging by 70% YoY to RM362.5m, translating to an estimated annualised credit charge of 5.5%. Management also presented that its net credit cost (NCC) in 2Q/3Q FY20 stood at 4.04%/3.91% arising from the new standards, from the average of c.2.00% in FY19. Management looks to progressively review its MFRS 9 model but potential changes are unclear at this stage. At the very least, management hopes that it will be able to contain its NCC to between 3.5%-4.0% going forward. Recovery of debts and reversal of provisions may come in due course.

Cover as many bases as possible. With a growing customer base and also favourable traction from its e-wallet platform, the group is keen to tap into cross-platform selling opportunities. Partnerships with insurance companies (most recently with Syarikat Takaful Malaysia) will open up more earnings avenues. Though not contributing meaningfully, the group’s brand of credit cards serve its targeted marketing efforts well and will play an expanding role. Additionally, investments into system upgrades may bump operating expenses in the near-term, but reap leaner costs in the long run.

Post-briefing, we trim our FY20E/FY21E earnings by 5.7%/1.4%. Mainly, we raise our FY20E annualised credit charge ratio to 5.2% from 5.0%, closer to the 9MFY20 level of 5.5% and expecting a more robust 4QFY20 performance with the coming CNY celebration to boost bottom-line.

Maintain UNDERPERFORM with a lower TP of RM12.80 (from RM13.00). Our TP is based on an unchanged 10.0x FY21E PER (0.5SD below the stock’s 3-year Fwd. Avg. mean) on our lower FY21E EPS of 128.0 sen. While the group may continue to grow its market share, we believe this comes with an enlarged cost of credit. Additionally, the group may take time to properly calibrate with the new accounting standards, which may leave book value-conscious investors cautious. Dividend yield prospects also appear uninspiring at current levels (c.3%) even at our bullish assumption of c.45.0 sen for FY20E/FY21E, in line with FY19 payment despite lower earnings.

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

Source: Kenanga Research - 23 Dec 2019