9MFY21 net earnings of RM362.3m (+110%) is below expectations due to larger-than-expected modification losses. 3QFY21 registered losses owing to it, with operating costs expected to be more buoyant going forward. While management is positive on a stronger closer in 4QFY21, we believe our estimates were too optimistic and we now err on the side of caution below management’s expectations. Hence, we cut our FY21E/FY22E earnings by 24%/8%. Downgrade to UP (from MP) with a lower GGM-derived PBV TP of RM0.540 (from RM0.605).

9MFY21 disappointed. 9MFY21 net profit of RM362.3m came below expectations, only making up 52%/49% of our/consensus full-year estimates. This was due to wider-than-expected modification losses which came from PEMULIH accounts. No dividend was declared, as expected.

YoY, 9MFY21 total income surged by 31% to RM1.10b, which was mainly attributed to lower modification loss impact (-61%) as the current year’s moratorium is experiencing a lower take up than the prior one. Net Islamic and interest income collectively saw a marginal increase as NIM improvements (3.38%, +23 bps) was offset by a lower financing base. Operating expenses rose by 9% from higher establishment and admin. cost, while loan impairments came out 30% lower, where provisions where heightened in the preceding year. Our computed annualised credit cost registered lower at 76 bps (-31bps). Reporting from an overall better landscape, 9MFY21 profits amounted to RM362.3m (+110%).

QoQ, 3QFY21 total income declined by 24% mainly due to a surge in modification loss of RM147.0m (2QFY21: RM13.2m). Meanwhile, NOII improved (+224%) from possibly non-recurring sundry income. Operating expenses saw a 53% spike as overall expenses returned, from more business activities. The quarter also recorded provisions of RM249.1m from a net writeback of RM227.0m in 2QFY21. This drove 3QFY21 to report a LBT of RM104.6m (2QFY21 PAT: RM403.4m).

Key briefing’s highlight. In spite of the volatility, management is confident that it will deliver better results in the final quarter, with an improved year-end guidance of: (i) 3-4% financing growth; (ii) credit cost of 45-50bps; and (iii) GIL of <5%. Management expects to report a net writeback which could ease credit cost to the assigned levels, with economic recovery seeking to translate to its target. However, we are conservative against applying these targets as consumers are likely to favour its larger cap peers. The hefty exposure to modification loss could be owing to its high retail mix, many of which are public servants. The high retail mix could translate to further application for assistance as such programs continue to be made available.

Post results, we slash our FY21E/FY22E earnings assumptions by 24%/8%. While we book in more modification losses, we also trim our financing growth (from 3.0%/5.0% to 1.5%/4.0%) as we are less optimistic than management’s target, based on the group’s YTD performance. Our dividend assumptions were also lowered from 3.0 sen/3.2 sen to 2.4sen/2.9 sen.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with a lower TP of RM0.540 (from RM0.605). In addition to the lower earnings, we also reduce our GGM assumptions to arrive at 0.38x PBV (from 0.42x, 2.0SD below mean). While the group may report better comparative earnings, we feel that its more volatile-than-industry report card may cause hesitation. At the moment, discussions on restructuring the group to be a Shariah-compliant organisation are still on the table, but until there is a clearer commitment, we believe interest in the stock could be limited.

Source: Kenanga Research - 30 Nov 2021