Friday, 10 April 2020

AEON Credit Service - FY20 Within Expectations (Kenanga Research & Investment)

 Fri, 10 Apr 2020

FY20 CNP of RM274.4m (-20%) is within our estimate but full-year dividends of 31.5 sen missed target. We believe the on-going MCO will dampen prospects with lower consumer spending and repayments, with strong impact from its primary B40 customers. That said, the group is bolstered by a portfolio with strong asset quality (NPL: <2 10.0x="" and="" br="" but="" conservative="" could="" cut="" earnings="" from="" group="" lower="" more="" mp="" normalcy="" on="" our="" per="" returns.="" rm8.80="" sustain="" the="" to="" tp="" until="" up="" upgrade="" valuation="" which="" x="">FY20 met expectations. FY20 core earnings of RM274.4m (excluding sukuk distributions) made up 103% and 98% of our and consensus’ estimates, respectively. Although the final interim dividend of 14.0 sen raised the total payment to 31.5 sen, it is still below our earlier anticipated 45.0 sen, owing to our overly-bullish payout assumption.

YoY, FY20 total income grew by 12% to RM1.42b mainly from gains in net interest income (NII +15%). This was helped by a larger base in gross financing receivables (+20%), mainly from key auto, motorcycle and personal financing segments. However, net interest margin was softer at 11.7% (-0.7ppt), likely skewed by a poorer receivable mix in line with the group’s total portfolio growth. More prudent impairments were made from MFRS 9 which saw an increase in provision by 46%. On top of less favourable cost-to-income ratio (CIR) of 40.8% (+2.4ppt) and credit charge ratio (CCR) of 4.9% (+0.8ppt), core earnings registered at RM274.4m (-20%). On other key metrics, non-performing loan (NPL) ratio remained stable at 1.92% (4QFY19: 2.04%) while net credit cost ratio was higher at 3.41% (4QFY19: 2.16%).

QoQ, 4QFY20 total income improved by 5%, but this was mainly on the back of higher operating income (possibly from higher bad debts recoveries) while net interest income remained stagnant. Thanks to lower impairment allowances (-23%), core net profit rose by 15% to RM80.1m.

Trying to catch a break. Throughout FY20, the group has been coping with poorer reported earnings owing to the more stringent requirements set by MFRS 9. Going forward, the group looks to face more hurdles due to the Covid-19 pandemic. Locally, the implemented movement control order (MCO) is likely to gag receivables growth at least in the first quarter. While AEONCR is a Non-Bank Credit provider and does not need to adhere to the six months moratorium, it has offered to allow a one-month deferment of payment for its customers. Nonetheless, with the economic landscape being strained, it is probable that the group’s NPL ratio could be stressed, albeit presently at a low base of below 2.0%. This is especially so given the group’s high B40 mix which we believe constitutes at least 50% of the group’s customer profile.

Post-results, we cut our FY21E earnings assumption by 14% mainly on the back of more cautious receivables growth and credit ratios. Nonetheless, this still translates to a 2% earnings growth against FY20 as we anticipate a softer 1HFY21 to be compensated by a recovery in 2HFY21. We also introduce our FY22E numbers.

Upgrade to MARKET PERFORM (from UNDERPERFORM) but with a lower TP of RM8.80 (from RM12.80). In addition to lower earnings assumptions, we also reduce our applied valuations from 10.0x (0.5SD below 3-year mean) to 8.0x FY21E PER (1.5SD below 3-year mean). Our more conservative valuation is premised on the severely constrained market environment and we also do not discount the possibility of the MCO being extended beyond April 2020, which could further dampen sentiment. However, with dividend yields of c.4% which we view as sustainable, we recommend accumulating on weakness, for yield seeking investors.

Risks to our call include: (i) higher/lower-than-expected cost ratios, (ii) better/weaker-than-expected financing receivable growth, (iii) better/weaker-than-expected asset quality, and (iv) worsening pandemic impact leading to prolonged countermeasures (i.e. prolonged or enhanced movement control order).

Source: Kenanga Research - 10 Apr 2020

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