1HFY24 net profit of RM219.6m (-8% YoY) and interim dividend were within expectations. The group continued to see a growing financing book and margins but these appears to be offset by normalising impairment behaviour. We maintain OUTPERFORM but raise our GGM-derived PBV TP to RM16.95 (from RM16.15) as we lower our risk-free rate inputs from stabilising interest rate outlook.

1HFY24 within expectations. AEONCR’s 1HFY24 net profit of RM219.6m came in within expectations, making up 53% each of both our full-year forecast and consensus’ full-year estimate. An interim 28.5 sen dividend was declared, at 34% earnings payout, which we also deem to be within our full-year expectation of 52.0 sen.

YoY, 1HFY24 net interest income grew by 21% following an 11% expansion in financing receivables backed by higher net interest margins (11.96%, +93 bps). On the other hand, operating income was flattish as higher fee income was offset by fewer recoveries of bad debts. Meanwhile, cost-to-income ratio saw an increase to 33.7% (+1.7ppt) largely due to rising personnel cost. Impairments also experienced deterioration and widened by 46%. However, this could be skewed by EPF withdrawals in 1HFY23 which benefited repayments then. All in, 1HFY24 net profit decreased by 8% to RM219.6m.

Outlook. AEONCR may continue to appear burdened by comparatively higher impairment charges but we do not see this as concerning given it could be seen as a normalisation of trends. That said, it is noted that the group has a high concentration of B40 customers (<60%) but the group has worked to address repayment concerns with an increase in downpayments on new lower quality accounts and a refinement of collection strategies through an AI risk-based calling model. We continue to anticipate growth in the group’s financing mainly from its key personal financing segment. Helping the group would also be its digital on boarding platform which smoothen the application process of new customers. At the time being, the group has a financing growth target of at least 10%.

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

Maintain OUTPERFORM with a higher TP of RM16.95 (from RM16.15). The higher TP is attributed to a reduction in our risk-free rate input to 4.0% (from 4.5%) in our Gordon Growth Model as the interest rate outlook stabilises. This improves our derived PBV to 1.50x (from 1.44x) with a lower COE of 11.8% (from 12.3%). Our TG of 1.5% and ROE of 17% are maintained.

We continue to see strength in AEONCR’s fundamentals are they stand out against conventional banking institutions with ROE prospects of over 15% with more modest dividend yields (c.5%). As the digital banking space grows, we believe investors may see such license holders (i.e. AEONCR) to possess more value propositions may embolden the stock attractiveness. Specifically with microlending in mind, it could see strong traction in an eventual strong economic growth environment.

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 - 27 Sept 2023