1HFY21 Core Net Profit came in below estimates due to the exceptional impairment losses in Q1 weak Transaction and Financing Volume. Nevertheless, we are encouraged by the improvement from its Motorcycle segment, which seemed to indicate that its B40 customers were not severely affected by the economic slowdown. Pending ACSM’s briefing later today, we have left our earnings forecasts, TP of RM9.15 and MARKET PERFORM call unchanged.

Below estimates. 1HFY21 CNP of RM73m (-41% YoY) accounts for 26%/32% of our/market estimates, dragged by the large impairment losses of RM286m (+15% YoY). This was further exacerbated by Day 1 Modification losses of RM28m relating to AEON Relief Programme launched in June 2020. An interim DPS of 9.2 sen was declared implying a pay-out ratio of 32% (in line).

Mixed performances from financing and receivables. 1HFY21 total income fell 10% YoY to RM628m (-0.5% QoQ to RM313m) as both NII and other operating income fell 6% YoY and 24% YoY, respectively. QoQ, other operating income improved +67% to RM80m while NII fell 13% to RM233m. The mixed performances in NII for the periods in question was attributed to the fall in Transaction & Financing Volume (- 38% YoY) to RM962b but up 24% QoQ. Financing receivables fell 2% QoQ although YoY, it improved +7% to RM10.2b. QoQ, decline in financing receivables was underpinned by Personal Financing (PF) at - 7% and Auto (-2%) whilst YoY growth was underpinned by Motorcycle and Auto Financing at +16% and +9%, respectively. 1H NIM saw 235bps YoY erosion to 10.3% (-150bps QoQ), likely skewed by a poorer receivable mix in line with the group’s total portfolio growth plus the modification loss in Q2. Asset quality was mixed with NPL down 12bps to 1.95% YoY but up 53bps QoQ. On a more positive note, receivables collection trend normalised (~`95% from 99% in Q1) with D1 and D2 (Delinquency collection ratio) falling to 78% and 76% respectively. This lower ratio led to lower Impairment losses (RM112m vs Q2: RM174m). On a net basis, credit charge fell 520bps to 1.6% on account of higher bad debt recoveries-RM35m vs RM14m in Q1.

Expect lower Impairments ahead. As expected, we see delinquency ratios coming down leading to a lower IL. Recall that the higher delinquency in 1Q led to higher provisioning due to impact from the MCO and we expect further improvement in IL in the coming quarters. The weak financing receivables is a concern, but we expect improvement ahead underpinned by rebound in Auto and SME financing. The slowdown in the economy does not seemed to impact its B40 customers as Motorcycle segment saw growth in both receivables and Transaction & Financing Volume.

We left our FY21E numbers unchanged for now, pending updates from management in today’s briefing. MARKET PERFORM call and TP of RM9.15 (based on FY21E PER of 8.35x) unchanged for now.

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 - 30 Sept 2020