1QFY22 net profit of RM58.2m (-8%) missed estimates. We had expected better growth in financing mixes while a lumpy hit to operating expenses was also a surprise. While we made no changes for now pending further details from today’s briefing, our updates are likely to be downside biased. That said, further details regarding the acquisition of MIDF could be a short-term sentiment booster. Maintain UNDERPERFORM and GGM-derived PBV TP of RM0.520 for now.

1QFY22 missed expectations. 1QFY22 net profit of RM58.2m came below expectations, only making up 10%/9% of our/consensus full-year estimates. The negative deviation appears to be due to a combination of lower-than- expected financing growth, softer-than-expected NIMs and higher-than- expected operating expenses (due to possibly lumpy personnel and IT costs). No dividend was declared but this was expected.

YoY, 1QFY22 total income was flattish at RM387.5m as a 2% rise in gross financing growth was offset by an erosion of NIMs (3.21%, -26 bps) possibly led by higher financing cost. Excluding modification losses, top-line however, declined by 7%. Operating expenses surged by 47% which management attributed higher technology costs to be one of the key reasons. This led PPOP to fall by 17% but thanks to lower annualised credit cost of 176 bps (-28 bps), 1QFY22 net earnings closed with only 8% decline to RM58.2m.

QoQ, 1QFY22 total income spiked by 59%, although this was due to 4QFY21 being bogged by higher modification losses. Excluding this, we see an 11% improvement in spite of a mere 0.7% sequential rise in financing base as NIMs were also comparatively better (+42bps). However, 4QFY21 saw net writeback of RM116.6m while 1QFY22 registered further impairment allowances (RM159.3m). This drew 1QFY22 net profit to come in 24% sequentially weaker.

Possible hurdles ahead. The group could possibly fall behind its FY22 targets, mainly with a financing portfolio growth of 10-11% (YTD: 2.3%). While we reckon it is still benefitting from improvements in the mortgage and retail financing climate, momentum seems to be waning. The group’s recent investment in technology costs could be an injection into developing its new digital platform and higher personnel cost could be in tandem to support new divisions, though we await clarity from management with regards to this. Meanwhile, the group’s GIL still remains peakish (c.6%) alongside the expiry of repayment assistance programs. Significant improvements need to materialise to achieve the targeted <3% levels for FY22.

Post results, we leave our assumptions unchanged for now, pending management updates from today’s briefing. We anticipate downside adjustment to our numbers, particularly with regards to our gross financing growth assumptions, NIMs and operating costs.

Maintain UNDERPERFORM and TP of RM0.520 for now. Our TP is based on a GGM-derived FY23E PBV of 0.4x (1.5SD below mean). Although the stock’s dividend prospects might appear attractive at 6-7%, the concern of further earnings disappointments is weighing down sentiment and capital returns for the stock. Investors may be keenly following the stock for its potential acquisition of Malaysian Industrial Development Finance Bhd (MIDF) but little is established about the deal as of now.

Risks to our call include: (i) lower-than-expected margin squeeze, (ii) higher-than-expected loans growth, (iii) slower-than-expected deterioration in asset quality, (iv) further gains in capital market activities, (v) favourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 27 May 2022