We maintain our GGM-derived PBV TP of RM16.95 (COE: 12.3%, TG: 2.5%, ROE: 19%) and OUTPERFORM call. AEONCR could be able to tide seasonal floods well which previously had bogged earnings, thanks to optimising exposure and credit controls in place. Meanwhile, the group’s financing pipeline appears sound with possible boons from festivities and digitalised fronts smoothening the process. Also, its digital banking timeline is expected to be met.

AEONCR hosted its 3QFY23 results briefing which we came out feeling assured on our medium-term projections. Key takeaways are as follows:

• Shift in accounts to drive sustainability and health. To address possible strains in asset quality from inflationary pressures, the group looks to tighten its credit criteria for its motor segment (36% books composition, namely for mopeds) which also has a high concentration of B40 customers. The group opines that its can accelerate efforts on used vehicles financing as well as personal financing products, the latter which is able to benefit from a rising OPR environment. Year-end festivities could also drive the reception of these target markets and could be backed by more aggressive marketing activities. Recall that the group has a FY23 loans target of 10%, which it achieved in 9MFY23.
• Dips in collection rate could be muted. FY22 saw a large dent in its collection due to year-end floods which undermined credit costs. With regards to the current predicament, the group indicated that its East Coast footprint makes up 8-9% of overall financing portfolio. With overlays of c.RM25m in place, the group is not overly concerned that a large hit from recent flood reports could cascade to severe provisions for 4QFY23.
• Further optimisation could keep costs low. The group recently launched its digital onboarding platform in September 2022 which enables instant conditional approval. The streamlined administrative and documentation process looks to vastly reduce processing time and could introduce efficiency gains in the future. This looks to be accompanied by an extension into personal financing end-to-end digital onboarding by January 2023.
• Digital bank on track to roll out by 4QCY23. With its reappointment of new management to lead, the group remains confident that It would be able to introduce its Islamic digital banking platform by 4QCY23. This is ahead of the imposed deadline by Bank Negara Malaysia is slated to be April 2024. Recall that AEONCR only holds 45% control and is expected to incur a capital injection of up to RM90m in the entity.

Forecasts. Post update, we make no changes to our model assumptions.

Maintain OUTPERFORM and TP of RM16.95. Our TP is based on an unchanged GGM-derived PBV of 1.68x (COE: 12.3%, TG: 2.5%, ROE: 19%) on an estimated CY23 BVPS of RM10.23. Against conventional banking institutions, AEONCR commands a leading ROE of >20% with more modest dividend yields (5%). We continue to expect sentiment for the stock to improve with subsequent updates as it is a proxy to stronger GDP output while its Islamic digital banking licence extends new value propositions to customers.

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 - 23 Dec 2022