AEONCR’s 1QFY25 net profit (+7% YoY) met expectations with the recent earnings release indicating results could have been better if not for spends on long-term customer acquisition strategies and on Aeon Bank. The stock’s presently solid ROEs (c.15%) may be taken further in the long-run should its investments pay off. Maintain our forecasts, OUTPERFORM call and GGM-derived TP of RM8.55.

1QFY25 met expectations. AEONCR’s 1QFY25 net profit of RM106.4m came in at 25% of both our full-year forecast and consensus full-year estimates each.

YoY, 1QFY25 total income rose by 17% as net interest income (+16%) benefited from a larger financing book (+13%) with other income seeing better debt recoveries. On the flipside, net profit for the period only grew by 7% as operating expenses were likely pressured by sales-related costs. Not helping either were losses from associates in relation to Aeon Bank, which began operations in 4QFY24.

QoQ, 1QFY25 net profit declined by 10%. In spite of total operating income improving by 8%, the quarter saw higher relative impairments (+43%) possibly due to poorer seasonal repayments attributed to customers prioritising festive spending.

Outlook. AEONCR may continue to see expansion in its financing books following supported demand in its key motorcycle, automotive and personal financing segments. That said, near-term earnings may be underpinned by higher customer acquisition costs tied to the launch of the group’s “AEON Living Zone” platform, which could pay off in the medium- term with better engagement with its captive pool of consumers, and to open up a smoother entry into the newly launched AEON Bank. Speaking of which, AEON Bank may also not likely be profitable in the immediate- term owing to the lack of revenue streams at present. However, this may improve over time as BNM progressively reviews the digital financing business models developed which will depend on non-conventional measures of credit assessment for approval.

Forecasts. Maintained.

Maintain OUTPERFORM and TP of RM8.55. Our TP is based on an unchanged GGM-derived PBV of 1.4x (ROE: 15%, TG: 1.5%) against a CY25F BVPS of RM6.12. We continue to laud 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.

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 Jul 2024