We maintain our OUTPERFORM call and GGM-derived PBV TP of RM8.55. AEONCR’s guidance for FY25 appears softer with inflationary concerns likely to hang over its lower income customer demographics, albeit reflecting improvements in approvals and collections. Meanwhile, Aeon Bank is likely to only contribute losses in the near-term as it builds up its customer base, which led to our cut in FY25F-FY26F earnings by c.9% each.

AEONCR hosted its FY24 results briefing to provide updates as well as to elaborate on its targets. Key takeaways are as follows:

- Targeting a more modest loans growth. In spite of achieving 13% financing growth for FY24, AEONCR is earmarking 10% growth in FY25 for now. We opine that the group could just be opting to be prudent given potential inflationary risks in 2HCY24. That said, the group continues to eye opportunities in the M40 segment with its new digital onboarding process for personal financing able to quicken turn-around time.

- Asset quality could further improve. The group had implemented its merchant management framework in Oct 2023 to improve the quality of new motor and objective financing accounts with apparent success. This is paired with AI credit scoring and pre-assessment mechanisms which could be attributed to the improving NPL in 4QFY24 of 2.57% (4QFY23: 2.89%).

- Comprehensive ecosystem to boost customer acquisition. The group is working towards consolidating its various services into a single platform, dubbed the “AEON Living Zone”. It aims to connect its Aeon Mall platforms, AEONCR as well as the upcoming digital bank, Aeon Bank. While this platform may take a longer period to develop, the group aims to launch Aeon Bank by May 2024.

- Medium-term strain for longer term digibank rewards. With regards to its 50%-owned Aeon Bank, the group had reported its first impact to P&L of RM16.6m in associate losses. Aeon Bank could likely continue to incur up to RM120m-RM140m/year in fixed expenses as it progressively builds up its presently lacking revenue streams. With support from the group’s ecosystem, it is hoped that Aeon Bank could tap into a captive client base to accelerate its expansion. The group is targeting to break even within its first four years of operations.

- Near-term ROE may narrow. Given the abovementioned losses from associate, the lower earnings prospects may hamper ROE with the group eyeing c.13% for FY25.

Forecasts. Post update, we incorporated the group’s guidance of its share of losses for 50%-owned Aeon Bank of RM60m/year in the near- term. This translates to us cutting our FY25F/FY26F earnings by 9.6%/9.3%.

Maintain TP of RM8.55. Following our earnings update, we opted to roll over our valuation base year from CY24 BVPS of RM5.59 to CY25F BVPS of RM6.11. Additionally, to reflect near-term pains from Aeon Bank which could undermine the group, we lower our GGM inputs from 17% ROE to 15%, lowering our derived PBV to 1.4x (from 1.5x).

In spite of the change in near-term inputs, we continue to believe 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. Maintain OUTPERFORM.

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 Apr 2024