We maintain our OUTPERFORM call and GGM-derived PBV TP of RM8.55. AEONCR may likely to continue seeing higher cost pressure from its integrated platform in addition to AEON Bank. That said, we anticipate continued organic growth in the group’s main financing pillars with EPF Account 3 withdrawals not likely to pose much impact to the financing landscape. Our forecasts are also unchanged.

Yesterday, AEONCR hosted its 1QFY25 results briefing. Key takeaways are as follows:

- AEON Bank’s operating expense to sequentially pick up. In the recent 1QFY25 results, AEON Bank contributed associate losses of RM11.6m which appears largely below the group’s guidance of RM60m-RM70m in FY25 for its 50%-ownership (i.e. RM120m-RM140m as a whole). This is attributed to the digital bank’s delayed launch on 26 May 2024 as opposed to an early target of Mar 2024. This could suggest subsequent quarters to be deeper in losses, as AEON Bank is expected to continue its heavy investments into market penetration and customer acquisition through its “AEON Living Zone” platform.

- Tapping onto captive markets. With regards to its customer acquisition since launch, AEON Bank appears to have captured a base of 66k customers albeit consisting mostly of existing Aeon shoppers and business partners. While the group seeks to increase its footprint in prospective customers outside the Aeon ecosystem, it may not participate in long- term interest rate competition (with present introductory deposit rates of 3.88%) as a means to retain customers to manage costs.

- EPF Account 3 withdrawal impact could be small. The implementation of EPF Account 3 opens up new access to cash for consumers. Similar to past EPF withdrawal schemes, this may aid the repayment of dues but may also reduce the urgency to undertake new borrowings.

That said, the group believes this could only impact lower value cash transactions for moped and personal financing needs. On that note, we gathered that the group’s B40:M40 mix could be close to 60:40 and suggest that lower income group may be more inclined to withdrawals. However, given that Account 3 balances may require time to accumulate, it may not pose as a meaningful alternative to AEONCR’s financing products.

- Asset quality comes first. The group emphasises on continued priority towards good quality customers to keep credit costs in check (1QFY25: 3.20%; 1QFY24: 3.87%). This could be enhanced with the group’s newly adopted AI credit scoring model which also significantly quickens the pre- assessment process. Meanwhile, to ensure more efficient bad debts recovery, the group employs the services of more third-party agencies and implements targeted collection measures.

Forecasts. Maintained.

Maintain OUTPERFORM and TP of RM8.55. Our TP is based on an unchanged GGM-derived PBV of 1.4x (ROE: 15%, TG: 1.5%) against a CY25F BVPS of RM6.12. We continue to laud AEONCR’s fundamentals as they stand out against conventional banking institutions with ROE prospects of c.15% with more modest dividend yields (c.5%). As the digital banking space grows, we believe investors may see such license holders (i.e. Aeon Bank) to possess more value propositions that may embolden 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 - 12 Jul 2024