Kenanga Research & Investment

AEON Credit Service (M) - Higher-than-Expected Write-backs in 1QFY23

Publish date: Tue, 05 Jul 2022, 09:12 AM

1QFY23 net profit of RM163.1m (flattish YoY) beat expectations thanks to lower-than-expected provisions from write-backs, alleviating the more cautious tone post 4QFY22’s lumpy impairment. We raise our forecast earnings by 15%/5% for FY23/FY24 on more relaxed provisioning requirements but raise TP to RM17.20 (from RM16.45) as we move to GGM-valuation basis, akin to valuing banks. Maintain OP.

1QFY23 beat expectations. 1QFY23 net earnings of RM163.1m beat our/consensus expectations, making up 39%/43% of respective estimates. Although the performance was flattish YoY, we had previously anticipated a more subtle QoQ improvement, after AEONCR incurred heavy impairment bookings in 4QCY22. That being said, the positive deviation from our estimate was due to higher impairment reversals which may indicate that asset quality issues are not as severe. No dividend was declared this quarter, as expected.

YoY, 1QFY23 net interest income was lower (-6%) mainly due to compressed NIMs (10.82%, -74bps) with financing receivables coming off slightly (-1%). On the flipside, fee-based income grew 15% possibly arising from the group’s expanding customer base. With that, total operating income only marked a flattish decline to RM371.1m (-1%). CIR narrowed to 32.0% (-4.2ppt) on leaner personnel cost. As for provisions, a net impairment of RM37.3m was recorded after a write- back of RM44.2m, but this is still 60% higher against 1QFY22. All in, 1QFY23 net earnings closed stagnant at RM163.1m.

QoQ, a stronger 1QFY23 likely fuelled by greater economic activity saw higher gross financing receivables (+1.4%), NIMs (+115 bps) and other operating revenues (+19%) leading to a 13.7% gain in total income. Recall that 4QFY22 was dragged by substantial impairment allowances on higher delinquencies reported during the quarter. With that, 1QFY23 saw comparatively lower provisions by 76% and this led to a sequentially better net profit by 598%.

Better times likely ahead. The group is keeping its >10% loans growth target which we believe could see some organic relief occurring as consumer spending returns. That said, digital efforts to enable more seamless onboarding are presently a key growth strategy and to also drive a larger recurring fee income base. A higher degree of automation would also improve credit processing which in turn could lead to a leaner operating environment. Additionally, better asset quality trend could also provide a solid breather for the group, moving in tandem with its larger financial lending contemporaries. In terms of guidance, AEONCR’s target CIR of <60% and ROE of >15% are intact and well- accounted for in our assumptions.

Post results, we raise our FY23E/FY24E earnings by 15%/5% mainly arising from lower credit cost assumptions in lieu of recent financing recoverable.

Maintain OUTPERFORM with a higher TP of RM17.20 (from RM16.45). Our higher TP is based on a newly applied GGM-derived PBV of 1.68x (COE: 11.7%, TG: 2.5%, ROE: 19%) on its estimated CY23 BVPS of RM10.23. The new valuation is to draw better comparability against financial institutions. We believe this is warranted as the group should progressively make headway with their digital banking license and offer similar banking facilities in the near future. Amongst the listed financial lenders, AEONCR boasts the highest ROE albeit with slightly modest dividend yield (4-5%).

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 - 5 Jul 2022

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