AEONCR’s 9MFY24 net profit (-5% YoY) met expectations. The group reported a spike in impairments, likely from faster turnover to collection agencies but may see a greater build-up in customer quality thanks to enhanced digital capabilities. Its digital banking service could be going live soon, nearing BNM’s Apr 2024 deadline. Maintain OP with a GGM-derived PBV TP of RM8.48, postcompletion of its 1:1 bonus issue.

9MFY24 within expectations. AEONCR’s 9MFY24 net profit of RM305.1m came in at 74% of both our full-year forecast and consensus full-year estimates. No dividend was declared this quarter, as the group typically declares biannual payments.

YoY, 9MFY24 net interest income rose by 16% following a 12% growth in its gross financing books alongside an 84 bps expansion in its net interest margins (to 12.04%). On the flipside, operating expenses increased on the back of greater operating volumes and personnel costs which led cost-to-income ratio to report at 33.9% (+0.6ppt). Adding to this, there were higher impairments arising from heightened staging requirements and credit cost came in at 5.33% (+102 bps). All in, despite the higher top line, 9MFY24 net earnings fell by 5% to RM305.1m.

QoQ, 3QFY24 reported only a slight increase in top line, reflective of its modest financing growth (+2%) amidst flattish interest margins. That said, it saw significantly higher writebacks similar to the abovementioned which caused 3QFY24 net profit to plunge 29% to RM85.5m.

Outlook. For its immediate earnings prospects, we anticipate further near-term pains derived from potentially higher provisions as the group employs a new collection risk-based scorecard which quickens the outsourcing of delinquencies to collection agencies to accelerate collection rates. That said, better digitisation could also translate to greater acquisition of quality customers which would over time dilute the group’s non-performing portfolio which now stands at 2.73% (2QFY24: 2.98%, 3QFY23: 2.54%). On the other hand, the group looks to unveil further offerings with its digital banking proposition with a competitor being the first entrant to the market. In the long-term, we believe it would bolster AEONCR’s existing ecosystem with its e-wallet platform already engaging up to 1.36m users.

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

Maintain OUTPERFORM and TP of RM8.48 (adjusted for the recently concluded 1:1 bonus issue). Our TP is based on an unchanged GGM-derived PBV of 1.50x (COE: 11.8%, TG: 1.5%, ROE: 17.0%) against a CY24F BVPS of RM5.63.

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 that 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 - 22 Dec 2023