1QFY24 net profit of RM99.3m (-39% YoY) was within expectations, with the earnings decline attributed to possibly higher seasonally skewed impairments. Financing demand is expected to be supported by general economic sustainability with the group eyeing a financing growth of at least 10% (YTD: 12%). Maintain OP and GGM-derived PBV TP of RM16.15.

1QFY24 within expectations. 1QFY24 net profit of RM99.3m came in within expectations, making up 24% each of both our full-year forecast and consensus’ full-year estimate.

YoY, 1QFY24 net interest income expanded by 19% on the back of a growing financing receivables portfolio (+12%) in addition to higher net interest margins (11.82%, +94bps). Meanwhile, other operating income saw a slight dip as higher fee-based revenue was offset by slower bad debts recoveries. While cost-to-income ratio remained mostly stable as operating expenses paced with the higher top line, there was a significant surge in financing impairments (+309%). Though we anticipate possibly higher delinquencies during the earlier Raya festivities in 1QFY24, the preceding 1QFY23 also had the benefit of higher write-backs with EPF withdrawals then allowing borrowers to settle their financing obligations early. Owing to this, 1QFY24 net profits declined by 39% to RM99.4m.

Outlook. We do not see the rise in group-level impairments to be an immediate concern for now, as AEONCR typically demonstrates swings in its financing book’s staging. This could be attributed to its high concentration of B40 customers who could be sensitive to reprioritising cash flow-related decisions, of which in the current period could be the earlier Raya season, in our opinion. We expect repayments to gradually resume as conditions normalise, mainly driven by the group’s key motor segment (i.e. mopeds). As long as economic prospects remain intact (albeit possibly at a slower rate), demand for financing will continue to be supported. Helping the group would also be its digital on-boarding platform which smoothen the application process of new customers.

Forecasts. Post results, we leave our FY24F/FY25F earnings unchanged.

Maintain OUTPERFORM and TP of RM16.15. Our TP is based on an unchanged GGM-derived PBV of 1.44x (COE: 12.3%, TG: 1.5%, ROE: 17%) on an estimated CY24 BVPS of RM11.25. Against conventional banking institutions, AEONCR commands a leading ROE of >15% albeit with more modest dividend yields (5%). We continue to expect sentiment for the stock to improve with subsequent updates as it is a proxy to stronger GDP output while its Islamic digital banking licence extends 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 - 11 Jul 2023