We maintain our GGM-derived PBV TP of RM17.20 (COE: 11.7%, TG: 2.5%, ROE: 19%) and OUTPERFORM call following our recent post-earnings upgrade. The group is confident that it will deliver a solid FY23 as asset quality looks to improve on better recoverability. Loans growth may require more aggressive efforts but AEONCR would emphasise on acquiring good quality accounts first.

AEONCR hosted its 1QFY23 results briefing which we came out feeling assured on our medium-term projections. Key takeaways are as follows:

• EPF withdrawals skewed financing receivables. Following the government relief for EPF withdrawals (up to RM10,000) in Apr 2022, certain customers took the opportunity for an early settlement of their loans, resulting in the flattish decline in gross financing receivables (-1% YoY). As the same program is not expected to be repeated, the group believes its financing growth target of >10% is back on track, capitalising on its high merchant base to push for a larger share in motor and auto financing. Broadly, a more robust economic environment would fuel demand for debt. We opine credit card spending could also see some resurgence, albeit it makes up less than 10% of total financing books.
   
• Asset quality to improve in the near term. The group credited lower net impairments seen in 1QFY23 to the same EPF withdrawals which allowed for better repayments. The better collection translated to higher writebacks for the quarter, mainly arising from the auto financing segment (28% of total receivables). Though this may be inorganically induced, we believe near-term recoverability will remain buoyant with the group’s digital onboarding and credit assessment capabilities allowing it to skim for new high-quality accounts. As of May 2022, the group still holds management overlays of RM38m.
   
• Funding cost under control. With regards to the possibility of higher OPR in the following months, the group believes there is little concern to its fund cost as they are mostly supported by long-term debt financing. The group’s debt profile otherwise consists of fixed rate borrowings. Meanwhile, the group has an existing cash pile of RM551m which they believe is sufficient to sustain working capital needs in the near term.

Post update, we make no changes to our FY23E/FY24E assumptions.

Maintain OUTPERFORM and TP of RM17.20. Our TP is based on a GGM-derived PBV of 1.68x (COE: 11.7%, TG: 2.5%, ROE: 19%) on its estimated CY23 BVPS of RM10.23. Against conventional banking institutions, AEONCR commands a leading ROE of >20% albeit with more moderate dividend yields (4-5%). We continue to expect sentiment for the stock to improve with subsequent updates as a proxy to better GDP output and with their Islamic digital banking license allowing them to propose new value propositions to customers in its eventual launch.

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 - 6 Jul 2022