We came away from a management briefing with a clearer outlook on its near-term prospects. Collection and Receivable are looking to normalize and we view the elevated Impairment Losses in 1Q as a blip due to the MCO. Unchanged earnings estimates but TP raised to RM9.15 ascribing to a FY21E PER of 8.35x (8.0x previously) implying 1.5SD below its 3-year mean. However, given that economic uncertainties still prevail post MCO, we maintain our MP rating.

Recap. 3MFY21 was disappointing with a RM26m CNP accounting for 9%/10% of our/market full-year estimate. Higher-than-expected impairment allowances, which surged 87% to RM174m eroded much of earnings due to collection activities hampered by the MCO and its one month loan deferment programme.

MCO causing casualties in collection. While Gross Financing Receivables (GFR) slowed +1.2% QoQ, total Transaction & Financing Volume declined drastically by 53% YoY, with major fallout coming from its core segments Personal Financing (PF), Motorcycle Financing and Auto Financing falling 74%, 58% and 60% respectively. Receivables slowed QoQ with PF, Motorcycle Financing and Auto Financing slowing at +0.4%, +3% and +3%, respectively, with the major drag coming from its credit card receivables (-8% QoQ). 1Q saw delinquency collection ratios reaching 88% and 86% for D1 (past due 1 month) and D2 (2-3 month past due), respectively, surging due to AEON’s one-month loan deferment. On a positive note, NPL was at 1.42% (4Q20: 1.92%) as customers delinquency status remained unchanged for those who are eligible for its loan deferment programme. NPL has been trending downwards since 2QFY20 even as receivables saw uptick, attributed to AEON’s effective process placed earlier to ensure asset quality. While sales and receivables were affected during the MCO, management sees June applications reaching 80% and returning back to normal. Intensive collection efforts will see D1 and D2 collection ratios dropping back to its average 80% and 70%, respectively, and the drop in delinquency will see the possibility of a credit reversals (writebacks) depending on the economic environment.

Asset quality still intact. Impairment losses surged 97% QoQ to RM174m due to changes in delinquency movement. Of these impairment losses (IL), RM105m came from written-off accounts which remained relatively stable (4QFY20: RM100m). IL provisions was at RM69m (vs. 4QFY20 reversal of RM13m) of which RM43m attributed to changes in delinquency movement, while IL provisions from new sales fell 47% QOQ to RM26m implying asset will remain intact ahead. Lower bad debt recovery at RM14m (vs 4QFY20: RM37m) coupled with higher IL pushed Net Credit Costs (NCC) by 313bps to 6.1%.

Digitization push. Although management expects 1QFY21 impairment losses to be the peak, key projects will be implemented in the current financial year namely; (i) Digitization, (ii) Regionalization, and (iii) Operational Efficiency with the objective of achieving cost-efficiency, customizing product offerings regionally and improving customer experience. The digitization will provide e-signature applicable to Easy Payment (subject to Ministry’s approval) expediting sales. Given that 85% of its customer base is in the Klang Valley and southern regions, disruption in payments and sales will be mitigated in the coming new normal. While managing risks will be challenging given that 70% of its customers comes from the B40 group, AEON is taking steps in proactively engaging financially constrained customers and offering its own Financial Assistance Programmes.

Post-briefing, we retained our FY21E earnings, where we penned in IL of RM526m as the absence of provisioning of delinquent repayments will see IL at RM120-130m in the coming quarters coupled with credit reversals. Call Maintained. Our TP is raised slightly to RM9.15 (from RM8.80) as we ascribe to 8.35x (from 8.0x) FY21E PER (1.5SD below 3-year mean). We reiterate MP given the economic uncertainties ahead giving rise to possible volatilities in collections and receivables.

Source: Kenanga Research - 29 Jun 2020