Its near-term prospect is expected to improve with focus to grow higher yielding assets i.e. Motorcycle and Personal Financing which was soft in the 1H, necessitating a looser credit policy. The looser policy necessitates higher provisioning, credit cost reversals and write-offs in the cards segment given the gradual economic recovery. Post September, the Aeon Relief Programme only affects 4% of its receivables and this mostly comes from the Southern region due to job losses from Singapore. Post briefing, we made no changes to our forward earnings but raised TP to RM10.15 as we roll over our valuation base to FY22. Market Perform reiterated given the uncertainty of 2nd wave pandemic.

Recap. 1HFY21 was disappointing with a RM73m CNP accounting for 26%/32% of our/market full-year estimate. While Impairment Losses (IL) fell 35%, earnings were offset by decline in gross receivables with poorer receivables from its higher yielding assets (PF and Auto) dragging NIMs.

Looser credit policy, higher provisioning. The lower impairment losses seen in 2QFY20 were due to: (i) reversal of delinquent movement (RM77m), and (ii) lower IL provisioning due to lower sales, despite a pre-emptive provisioning of RM134m for potential COVID-19 impact. Bad debts recovered or written off were lower (RM38m) attributed to temporary revision in write-off criteria as AEON provides a Relief Programme (ARP) post September for eligible customers, of which 97% applied. On a positive note, ARP loan amount is 4% of total receivables (RM410m). The pre-emptive provisioning is to cater for the ARP and grow its receivables in the coming quarters - coming from Motorcycle (superbikes, mopeds) and PF segment – necessitating a looser credit policy and higher provisioning. On a positive note, customers under the ARP are mostly from the Johor region – due to job losses from Singapore. As such, we see IL tapering off in the coming quarters given this front-loading strategy coupled with credit reversals and write-offs as the economy slowly recovers.

Growing receivables. As mentioned above, to help cushion NIM pressures, management targets to grow its higher yielding segments; Motorcycle (superbikes and mopeds) and PF. Note that both its Motorcycle (33%) and PF (26%) segments constitute 59% of total receivables with PF suffering a 7% decline QoQ in 2QFY20. On a positive note, despite the 2% QoQ decline in receivables, YoY saw an increase of +7% coming from motorcycle (+16%) and Auto (+9%). That said, the growth in AEON's auto loan book is likely to slow down due to the lower interest rates (as most of its financing are for used cars), focusing instead on higher yielding PF.

Post-briefing, we retained our FY21E earnings, where we maintained our conservative assumptions; (i) financing growth at +<5%, and (ii) IL of RM526m.

Call maintained. Our TP is raised slightly to RM10.15 (from RM9.15) as we roll over our valuation to FY22 ascribing to 8.78x (from 8.35x) PER (-0.5SD below 5-year mean). Market Perform is reiterated given the potential risk of a 2nd wave necessitating further provisioning.

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 - 1 Oct 2020