• Upgrade to BUY, from Neutral with an unchanged MYR16.20 TP, 19% upside and c.3% FY23F (Feb) yield. 1QFY23 results beat our and Street expectations convincingly on a net reversal of impairments on top of an improved topline performance. The current share price provides an attractive entry point to capitalise on a possible share price re-rating. We keep our forecasts unchanged as we await the analyst briefing later today. This report marks a transfer of coverage to Fiona Leong.

• FY23F off to a flying start. 1QFY23 net profit stood at MYR163.1m (+790.5% QoQ, -0.0% YoY), which represented 46% and 43% of our and consensus full-year estimates. The QoQ surge was mainly due to the 75.9% decrease in impairment charges, and aided by a 43.1% increase in bad debts recovered attributable to the special Employees Provident Fund (EPF) withdrawal programme in April. As a result, there was a net write- back of MYR17.8m in 1QFY23 vs a net charge of MYR116.2m in 4QFY22.

• 1QFY23 earnings drivers. Net interest income improved 11.5% QoQ on the back of greater collection efforts following the Omicron-induced productivity setback in 4QFY22. At the same time, operating expenses came in lower by 6.8% QoQ, bringing 1QFY23 PIOP to MYR197.8m, or higher 22.8% QoQ. On a YoY basis, lower topline contributions were offset by lower interest expenses (-9.4% YoY), and aided by receding operating expenses (-12.2% YoY). As a result, PIOP increased 1.2% YoY. For 1QFY23, CIR stood at 37.5% (1Q22: 40.9%, 4Q22: 44.2%), which is comfortably in line with its FY23 target of less than 60%.

• Business momentum continues. New sales rose 1.6% QoQ to MYR1,487m in 1QFY23. Gross receivables grew 1.4% QoQ, picking up on the previous quarter’s recovery theme. At an annualised rate of 5.6%, this currently stands short of management’s 10% target for the full year. However, we are cognisant of the one-off early settlements arising from the special EPF withdrawal programme that could have dampened loans growth for the quarter.

• Re-strengthening of asset quality. Gross NPL ratio declined slightly to 2.53% in 1QFY23 from 2.66% in 4QFY22, attributable to the normalisation of collection activities following a setback in the previous quarter. While LLC continues to trend lower at 281% (4QFY22: 289%, 1QFY22: 409%), we see no urgent need for increased provisions for the time being, particularly as MYR42m in overlays had been provisioned for in the previous quarter.

• Upgrade to BUY with an unchanged MYR16.20 TP. After the recent profit- taking following Aeon Credit Service’s receipt of a digital banking license, the stock is currently trading at 1.54x FY23F P/BV, which is around -0.5SD from its 5-year mean. We believe its current share price provides an attractive entry point for investors given the healthy improvement in underlying operations. We keep our forecasts unchanged as we await management’s briefing at 10am later today.

Source: RHB Research - 5 Jul 2022