AEONCR’s 9MFY22 CNP of RM337m beat our/street’s full-year estimate by 104%/93%, mainly on lower-than-expected impairment losses, fuelled by write-back on credit loss expected earlier. Looking ahead, we expect receivables/volume recovery and lower impairments, as management’s stringent asset quality control bears fruit. We raised FY22-23E earnings by 28%-9% on lower impairment assumptions and raised DPS to 50.0 sen each year. Maintain OP with a higher TP of RM16.60 as we roll forward our valuation using FY23E PER of 10.6x (3-year mean).

9MFY22 above expectation. 3QFY22 core net profit (CNP) of RM103.5m brought 9MFY22 CNP to RM337m, making up 104%/93% of our/street full-year estimates, exceeding expectations. The deviation was mainly due to a much lower-than-expected impairment loss. No dividends declared as expected, as dividends tend to be declared in 2Q and 4Q.

YoY. 9MFY22 CNP jumped 193% on: (i) higher NIM (+0.4ppt), (ii) lower credit cost ratio (-3.8ppt) due to lower impairment losses (-66%), and (iii) higher other income (+16%). Note that the lower impairment loss is largely due to a write-back on allowance for expected credit loss of RM48.5m, attributed to lower existing delinquent receivables in 3QFY22.

QoQ. 3QFY22 CNP rose 47% to RM103m mainly due to: (i) lower credit cost ratio (-2.4ppt) on lower impairment losses (-64%) and (ii) higher other operating income (+45%). The lower impairment loss is also due to the aforementioned write-back in 3QFY22.

Outlook. Moving forward, we expect continued recovery in its transaction and financing volume, building on its 11% YTD YoY growth. We also expect gross receivables to follow suit, fuelled by resumption in consumption and AEONCR's year-end marketing campaigns. That said, we are expecting a weaker 4QFY22 vis-a-vis 3QFY22, mainly on lower write-backs, as we are still expecting receivables growth QoQ. We believe management's stringent asset quality control should allow them to maintain its healthy NPL% of 1.75% and current collection ratio of 98.5%. That said, we might see NPL inching up and collection inching down marginally due to the floods, but any impact should be negligible.

Post results, we raise FY22-23E CNP by 28%-9% to factor in lower impairment losses, with FY22E changes mainly driven by write-backs in 2HFY22. Our FY23E net profit has also factored in the prosperity tax, which we’ve excluded in our core net profit estimate, as it is one- off. We raise FY22-23E DPS from 40.0 sen/45.0 sen to 50.0 sen each, as AEONCR historically consistently paid >30% of CNP. Note that FY23E CNP is lower YoY as FY22E CNP is inflated by write-backs.

Maintain OUTPERFORM with a higher TP of RM16.60 (from RM14.00) as we roll over our valuation base to FY23E, based on its current 3-year mean PER of 10.6x (previous 3-year mean was 11x). Key catalysts include: (i) normalisation of impairments on improved accounts collection, (ii) resumption of total transaction and financing volume/financing receivables, and (iii) a potential digital bank license, as AEONCR already serves the underserved.

Risks to our call include: (i) lower-than-expected receivables growth, (ii) extension of moratorium, (iii) higher-than-expected impairment losses, and (iv) lower-than-expected write-backs.

Source: Kenanga Research - 24 Dec 2021