We maintain our OUTPERFORM call and GGM-derived PBV TP of RM16.95. The group opted to maintain its financing growth and ROE targets for FY24. 2HFY24 looks to see more digital fronts with AI-fronted credit scoring and screening to drive efficiency. Meanwhile, its Islamic digital bank launch appears to be on track with AEONCR injecting an allocated fund of RM175m cash for its 50% equity stake in ACS Digital (ACSD).

AEONCR hosted its 1HFY24 results briefing to provide progress on its digital initiatives and ongoing outlook. Key takeaways are as follows:

- Working on a better financing mix. There has been a gradual increase in AEONCR’s personal financing mix (29% of gross receivables, +3ppts YoY) as the group’s digital onboarding processes have become more assessible. The quicker approval and disbursement process appear to be a key draw as well. That said, the group indicated its B40 proportion remains at 60% of its portfolio, which may be diluted with its push to drive credit card customers.

- AI to stimulate acquisition of quality customers. From its past investments, the group indicated a rising utilisation of AI technology in its operating processes. For customer acquisition, AI credit scoring would refresh assessment criteria and attributes on a monthly basis to ensure that high quality prospective customers are not denied due to the same tight perimeters applied to riskier accounts. Meanwhile, its filter could assist AEONCR in the suspension of merchants with a track record of introducing high defaults but low profitability accounts to the group. All in, its 10% financing growth target seems well achievable.

- Collection rates also uplifting. Also thanks to better technology, the group implemented a collection risk-based scorecard which led to more time spent on at-risk accounts and quickening the outsourcing to collection agencies to accelerate collection rates. The group reported that its collection ratio for accounts past 2-3 months due improved to 71.0% in 2QFY24 from 67.4% in 1QFY24. Meanwhile, the group has also softened its non-performing loans to 2.98% (1QFY24: 3.13%) which the group opines could further be reduced. Net credit cost should remain manageable between 3%- 4%.

- Still some overlays left. As of Aug 2023, the group still maintains management overlays of RM72m booked due to pandemic contingencies. Having written back RM41m in the recent quarter, we believe the group could be more open to writing back the remaining balance, mainly thanks to the abovementioned asset quality containment measures.

- Digital bank on the way. AEONCR’s digital banking unit ACSD remains on track with the completion of its equity subscription pinned at 4QCY23. AEONCR would provide an injection of RM175m funded by internal cash for its 50% stake, with the remainder held by parent-co Aeon Financial Services. Up to RM550m would be injected to fund ACSD’s operations in the next five years. Eventually, their respective holdings would dilute to 35% each to provide 30% ownership to Malaysian shareholders.

Forecasts. Post results, we leave our FY24F/FY25F earnings unchanged. Barring unexpected shock to earnings, the group’s 15% ROE target could also be well met which we believe the group is poised to sustain even in consideration of possibly higher impairment requirements. Meanwhile, the group had earmarked 4QCY23 for the completion of its 1:1 bonus issue.

Maintain OUTPERFORM and TP of RM16.95. Our TP is based on an unchanged GGM-derived PBV of 1.50x (COE: 11.8%, TG: 1.5%, ROE: 17%). 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, emboldening the stock attractiveness. Specifically with micro-lending 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 - 29 Sept 2023