We retain our NEUTRAL call with a revised MYR12.60 TP, implying a 7% downside. 2QFY16 results missed estimates, mainly on the back of weaker-than-expected NIMs. Otherwise, receivables growth gained momentum while asset quality improved. Nevertheless, we will continue to watch out for asset quality issues as we see the macroeconomic environment heading for a softer patch ahead.

Below expectations. AEON Credit’s 2QFY16 (Feb) net profit of MYR49m (+2% YoY, -17% QoQ) was below expectations, with 1HFY16 net profit of MYR107m (+3% YoY) accounting for 44% of our and 46% of consensus estimates. The key variance was weaker-than-expected margins. AEON Credit declared an interim DPS of 29.85 sen (2QFY15: 27.4 sen).

Results highlights. Positive takeaways were: i) receivables growth picked up pace, up 5% QoQ (+19% YoY) compared with 1QFY16’s +3% QoQ (+22% YoY), ii) gross non-performing loans (NPL) ratio improved to 2.58% vs 1QFY16’s 2.74% (2QFY15: 2.65%), and iii) credit cost was lower with impairment allowance/receivables at 4.59% in 2QFY16 (1QFY16: 4.73%; 2QFY15: 5.05%). On the flip side, we estimate 2QFY16 net interest margin (NIM) to be compressed by 80bps QoQ (-190bps YoY) to 12.8% due to pressure on average asset yield. Consequently, despite the growth in receivables, net interest income was down 4% QoQ (+5% YoY). In addition, operating costs rose 8% QoQ and 14% YoY. As a result, the cost-to-income ratio deteriorated to 38% (1QFY16: 34%; 2QFY15: 36%).

Forecasts. We trimmed our FY16-18 net profit projections by c.6% pa,mainly after toning down our NIM forecasts.

Still NEUTRAL. Following the earnings revisions above, we lowered our TP to MYR12.60 from MYR13.40, based on a target FY16 P/E of 8x. Notwithstanding the improvement in asset quality during the quarter, we have conservatively kept our target P/E at 1SD below the stock’s average P/E. The macroeconomic environment is headed for a softer patch ahead, and this may see asset quality of financial institutions come under pressure. Maintain NEUTRAL.