We retain our NEUTRAL call with a revised MYR12.75 TP, implying an8% upside. 3QFY16 results were broadly in line, driven by stronger net interest income growth with stable receivables growth while NIM saw a sequential improvement. Asset quality, however, deteriorated QoQ. We believe asset quality will continue to remain in focus as we see the macroeconomic environment heading for a softer patch ahead.

Expecting stronger 4QFY16. AEON Credit’s 3QFY16 (Feb) net profit of MYR53m (+11% YoY and +10% QoQ) was broadly within expectations, with 9MFY16 net profit of MYR160m (+5% YoY) accounting for 71% of our and consensus FY16 estimates. We expect 4QFY16 to be a seasonally stronger period.

Results highlights. 3QFY16 net profit growth was largely driven by stronger net interest income, on the back of stable receivables growth as well as an estimated 60bps QoQ expansion in net interest margin (NIM) – possibly a reflection of AEON Credit having repriced up some of its products such as general easy payment, personal finance and motorcycle easy payment sometime Apr-May 2015. The gross nonperforming loans (NPL) ratio, however rose to 2.68% vs 2QFY16’s 2.58% and as a result, credit cost was higher with impairment allowance/receivables at 4.66% in 3QFY16 (2QFY16: 4.59%).

Outlook. Management expects to end FY16 with receivables growth between high-teens and 20% while for FY17, growth is expected to moderate to 15-20%, partly due to larger base effect. NIM, however, is expected to remain under pressure due to the continued shift in product mix to car and motorcycle financing, as well as the focus on lower credit risk customers. Finally, on asset quality, AEON Credit was hopeful NPLs would be stable in 4QFY16, aided by the BR1M payout.

Forecasts. We tweaked our FY16-18F net profit lower by 2-3% pa.

Still NEUTRAL. We revised our TP to MYR12.75 from MYR12.60 post our earnings revision and a switch in valuation methodology to the Gordon Growth Model (GGM) from P/E. Our GGM assumes: i) COE of 15%, ii) 26% ROE, and iii) 4.5% long-term growth, resulting in a fair 2016 P/BV of 2.05x (previous TP was based on target 2016 P/E of 8x). The macroeconomic environment is headed for a softer patch, and this may see asset quality of financial institutions come under pressure. Maintain NEUTRAL.