1QFY21 CNP of RM26m came below expectations accounting for 9%/10% of our/market estimates. We believe the prolonged economic downturn will dampen prospects with lower consumer spending and repayments, particularly from its primary B40 customers. We maintain TP of RM8.80 and MP call pending further updates from management today.

Below expectations. 1QFY21 CNP of RM26m accounts for 9%/10% of our/market estimates. The negative deviation was due to higher-than expected impairment allowances, which surged 87% to RM174m (exceeding our expectation by RM43m/quarter).

Higher provisioning but written-off accounts remained stable. 1QFY21 total income declined both YoY/QoQ at -6%/-14%, respectively, to RM315m, dragged by falling other operating income of - 41%/-48% YoY/QoQ. YoY, NII continued to show resilience at +5% but fell 3% QoQ to RM267m, as expected. The mixed performance in NII was due to improved gross financing receivables at +15% YoY while QoQ, it was soft at +1% due to loan deferment. YoY improvement in gross receivables stemmed from the core segments; PF, motorcycle and auto financing growing at +11%, +21%, and +16%, respectively. QoQ, these same segments saw weaker financing growth at +0.4%, +3% and +2%, respectively. NIM saw 150bps erosion YoY to 11.2%, likely skewed by a poorer receivable mix in line with the group’s total portfolio growth. On a positive note, CIR fell by 6ppt/11ppt to 33%. NPL saw improvements YoY and QoQ, down 50bps each to 1.42% as delinquency status remained unchanged for those eligible for loan deferment programme. The rise in credit charge at 7.4% was mainly due provisioning building up arising from the MCO impact while written off accounts remained stable at RM105m (vs 4QFY20: RM100m).

Further economic challenges entail higher provisioning. Throughout FY20, the group had been coping with poorer reported earnings owing to the more stringent requirements set by MFRS 9. Going forward, the group looks to face more hurdles due to the Covid- 19 pandemic and prolonged macroeconomic challenges. Locally, the implemented MCO is likely to gag receivables growth at least in the first quarter. While AEONCR is a Non-Bank Credit provider and does not need to adhere to the six months moratorium, it has offered to allow a one-month deferment of payment for its customers. Nonetheless, with the economic landscape being strained, it is probable that the group’s NPL ratio could be stressed ahead, albeit presently at a low base of below 2.0%. This is especially so given the group’s high B40 mix, which we believe constitutes at least 50% of the group’s customer profile.

Post-results, we make no changes on our FY21E numbers for now, pending updates from management in today’s briefing (likely with downside biased adjustments).

TP and call maintained. Pending further updates, we maintain TP at RM8.80 with a MARKET PERFORM call, ascribing a 8.0x FY21E PER (1.5SD below 3-year mean). Our more conservative valuation is premised on a challenging market environment and we also do not discount the possibility of higher provisioning and NPLs given the economic downturn.

Risks to our call include: (i) higher/lower-than-expected cost ratios, (ii) better/weaker-than-expected financing receivable growth, (iii) better/weaker-than-expected asset quality, and (iv) worsening pandemic impact leading to prolonged counter-measures (i.e. prolonged or enhanced movement control order).

Source: Kenanga Research - 26 Jun 2020