We maintain our OUTPERFORM call but lower our GGM-derived PBV TP to RM16.15 (from RM16.95). The group’s targets for FY24F indicate aspiration for stable and consistent expansion in its key segments but may see strains in collection as it grows its books. Although we tone down our earnings forecasts for more aggressive credit cost pressures and lower ROE inputs, the stock still offers growth opportunities and is a proxy away from deposits competition faced by full-fledged banks.

AEONCR hosted its 4QFY23 results briefing from which we noted possible risks to its non-performing loans (NPL) but would not be detrimental to overall earnings growth. Key takeaways are as follows:

- Hopeful for sustained financing growth. For FY24, the group believes it could replicate the 10% growth in gross financing delivered in FY23. This could be driven by continued demand for mopeds in its motor segment (35% of total books) thanks to direct partnerships and merchant incentives to funnel high quality accounts. The personal financing segment could also gain from the launch of the group’s digital onboarding allowing more seamless acquisition. Meanwhile, closer collaboration with Aeon Retail could translate to greater credit card transaction volumes.

- NPL could stretch from a larger book. Closing with an NPL of 2.89% in FY23, the group anticipates FY24 NPL to creep into the 3%-4% level, mainly owing to possible influx of poorer quality customers as it acquires more accounts. We believe that inflationary pressures could deteriorate customer cash flows and trigger missed repayments. That said, the group opines that it will not be overly affected should this materialise. The group still holds loan loss coverage of 252% in FY23 with management overlay provisions of RM105m.

- Investing on upgrades. The group indicates plans to further bolster its digital capabilities. For one, it would kick start a migration to cloud-based systems with higher investments on eKYC to smoothen onboarding. The proposed joint venture with MoneyLion to build its digital banking platform has been terminated, and AEONCR has sought an alternative technology partner. It appears to us that the Aeon Group may be taking ownership of the full ecosystem. For the time being, both the Aeon e-wallet and digital bank will operate in isolation but integration could be an eventual plan.

Forecasts. Post update, we slash our FY24F/FY25F earnings by 19%/10%. This is mainly due to us booking higher credit costs to be closer to the group’s tone, to 4.50%/4.25% (close to FY23F of 4.47%). This offsets higher financing growth projections for the period. In spite of the more conservative inputs, our new earnings estimates are still comfortably above the group’s ROE target of 15%.

Maintain OUTPERFORM with a lower TP of RM16.15 (from RM16.95, previously). In lieu of AEONCR’s lower earnings prospects, we lower our ROE inputs in our GGM to 17% from 19%. With a cost of equity of 12.3% and terminal growth of 1.5%, our applied PBV is reduced to 1.44x from 1.68x. However, we take this opportunity to roll over our valuation base year to CY24F to a BVPS of RM11.25, hence leading to the higher TP.

Against other traditional financiers, AEONCR still commands a stronger ROE (vs. banks average at 11%) whilst being able to operate with stable interest margins as its funds are not derived from deposits. We 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-anticipated write-backs.

Source: Kenanga Research - 13 Apr 2023