We maintain our OUTPERFORM call and GGM-derived PBV TP of RM7.00. AEONCR eyes better recoveries and possibly lower provisions in the upcoming quarter, though LGD model updates may result in a more neutral impact as a whole. The group appears sheltered from the possible abolishment of Rule of 78 while Aeon Bank is slated to begin providing financing products as soon as early CY25.

Last Friday, AEONCR hosted its 3QFY25 results briefing. Key takeaways are as follows:

- Credit cost woes may see some relief. 3QFY25's net profit disappointment was mainly attributed to general provisions across its portfolio whereas prior periods benefited from writebacks. Gross credit cost of 5.89% (net credit cost 4.24%) was above our anticipated 5.00%. This was contributed by the group's high loans growth of 15%. That said, AEONCR's NPL ratio is narrowing to 2.42% (-24 bps YoY) as a result of more effective monitoring and outsourcing of debt recovery.

Going into 4QFY25, the group will refresh its ECL which could translate to some writebacks, albeit a further update to its LGD may net it off. In the longer term, impairments will be kept closer to RM50m/month once it is able to balance its staging needs, which would imply a net credit cost "target" of 4.00% based on current outstanding loan base.

In spite of a net credit cost target of 4.00% for FY25 with an NPL ratio of 2.4% in mind, we are more conservative with our expectations at 4.12% owing to higher volatility seen recently.

- Abolishment of Rule of 78 may see not accounting impact. With regards to BNM's recent proposal to abolish the Rule of 78 on interest instalments, AEONCR is already computing its interest income using effective interest rate method, but looks to form a committee to more thoroughly access any developments and potential implications to earnings in the event portfolio adjustments are needed.

- Aeon Bank beefing up. The number of active users for Aeon Bank has grown to 100K in 3QFY25 from 70K in 2QFY25, with a majority of its new users being customers of the wider Aeon group. That said, its CASA pool did not move meaningfully at RM300m during the quarter. For now, the digital bank is on track to launch its first lending and termed deposit products by early CY25.

Forecasts. Earnings maintained. In our earlier results note, we had trimmed our FY25F/FY26F earnings by 16%/4% as we stay cautious on impairment risk to earnings. That said, our FY26F loans growth assumption of 8% could see an upside in the medium term should the group keep up with its customer acquisition trajectory.

Maintain OUTPERFORM and TP of RM7.00. Our TP is based on an unchanged GGM-derived PBV of 1.2x (ROE: 13%, TG: 1.5%) against a CY25F BVPS of RM5.89. Our applied ROE is in line with the group's near-term target and is below its 5-year historical ROE of 17%, being weighed down by ongoing impairment concerns and digital banking losses.

That said, as the digital banking space grows, we believe investors may see such licence holders (i.e. Aeon Bank) as possessing 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. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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 2024