We maintain our OUTPERFORM call but trim our GGM-derived PBV TP from RM17.20 to RM16.95 (COE: 12.3%, TG: 2.5%, ROE: 19%) on slightly more conservative credit cost inputs post analyst briefing. We still opine the group could deliver sustainable earnings as it balances against slightly more conservative quality expectations with stable expansion in its financing books. Meanwhile, the group’s digital banking roll-out timeline appears promising, indicated to be ahead of BNM’s target.

AEONCR hosted its 2QFY23 results briefing from which we came out cautious on possible near-term hurdles. Key takeaways are as follows:

- Inflationary pressures may narrow financing prospects. 1HFY23’s 8% financing growth is short of 10% full-year target due to softer growth in auto financing (+2%) whereas motorcycle (+10%) and personal financing (+12%) books were highly supportive. With the group predominantly catering to the B40 segment (est. 65% of clientele), inflationary pressures may result in lower 2HFY23 growth performance, mainly in the auto segment. That said, we believe that the increase in minimum wages (RM1,500 since May 2022) could sustain the group’s market share in the less committal personal financing segment. Additionally, the Oct 2022 launch of new e-wallet and iAEON finance interface should boost the group’s mix of higher income customers, while further updates in 2023 could introduce more seamless onboarding processes.

- Closer purview to keep asset quality manageable. The abovementioned inflationary pressures bring rise to delinquency concerns, particularly in the same B40 portfolio. While this has not translated meaningfully into impairment provisions, the group did book in higher impairments in line with its expansion in receivables (2QFY23: RM150m vs 1QFY23: RM81m, not accounting for writebacks). Additional management overlays of RM11.1m have also been booked in 2QFY23, indicative of a more guarded mindset. To mitigate asset quality risks, the group opts to decline applicants not meeting a certain income level while increasing down payments in auto financing to secure better recoverability.

- Digital banks may come way ahead of April 2024 deadline. With regards to its Islamic digital banking timeline, the group aspires to commence operations by October 2023, ahead of BNM’s April 2024 target. As AEONCR only holds 45% of the entity, it would only inject up to RM90m for capital. Additionally, the group seeks to appoint a separate team of vendors and consultants in the development of the digital bank, owing to different expertise required. That said, it would not leave any impact to earnings in the near-term.

Forecasts. We cut our FY23F earnings by 8% as we factor in higher credit costs (to 3.0% from 2.5%) against possibly higher B40 defaults arising from inflationary pressures. That said, our 9% financing growth expectation for FY23 is behind the group’s 10% target but is fairly reflected in year-to-date performance. Meanwhile, our FY24F numbers are relatively unchanged.

Maintain OUTPERFORM with lower TP of RM16.95 (from RM17.20, previously). 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.

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 - 3 Oct 2022