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Friday, December 23, 2016

Brokers Report: AEON Credit Service (M) - Within Expectations

Maintain OUTPERFORM  with unchanged target price (TP) of R17.76

9M17 CNP came in within expectations. Absence of dividend was expected. No changes made to our earnings estimate. It remains as our most preferred name in the NBFI space given its: (i) resilient earnings prospects on healthy gross financing receivables growth of 8-9%, (ii) decent asset quality with NPL at low 2-3%, (iii) healthy CAR of c.19%, (iv) high ROE of >20% as well as (v) decent yields of 4.5-4.8%. Moreover, valuation is still undemanding at 8.0x FY18E PER. Maintain OP with an unchanged TP of RM17.76.

Within expectations. The group reported 3Q17 core net profit (CNP) of RM63.4m (+22% QoQ; +27% YoY), widening its 9M17 CNP to RM174.5m (+17% YoY) which made up 72% of both our and consensus full-year forecasts. Note that the group’s 4Q is the seasonally strongest quarter. As expected, no dividend was declared. We are expecting the group to declare a total net DPS of 64.0 sen for FY17.

YoY, 9M17 total income grew by 14% driven by stellar performances in both net interest income and other operating income. Delving deeper, net interest income increased by 21% attributed to higher net financing receivables while higher growth of operating income (+13%) was due to stronger recovery of bad debts, better commission income from sale of insurance products and AEON Big loyalty programme’s processing fees. Meanwhile at the bottom line; despite the higher cost-to-income ratio (CIR; of +2.1ppts to 35.9% which was due to higher OpEx for investment in new systems, employees incentives and A&P costs for anniversary celebration) coupled with the higher effective tax rate of 25.4% (+1.3ppts), CNP still improved by 17%. Looking at other key metrics, Net Interest Margin (NIMs) continued to decline modestly to 12.8% (-0.7ppts) dragged by lower average lending yield (-0.69ppts). Nonetheless, asset quality improved as non-performing loan (NPL) ratio fell by 35bps to 2.33% (as of 3Q17), amid the marginal decline in the credit charge ratio (CCR) to 5.3% (from 6.1% in 3QFY16). Annualised ROE remained healthy at 27.6% (-0.2ppts) while CAR remained at c.19%.

Meanwhile on QoQ basis, 3Q17 CNP improved by 22% on: (i) lower allowance made for impairment losses (normalisation from the higher allowance made last quarter during the post Hari-Raya period) coupled with (ii) lower CCR of 5.2% (-0.8ppts) compared to 2Q17’s CCR of 6.0% (which was on higher employees incentives and A&P costs spent for anniversary celebration). Meanwhile, NPL ratio continued to improve to 2.33% (from 2.43%) which was helped by higher net financing receivables.

Continued to showcase its strength. Loan demand from AEONCR’s targeted customers - retail market is still resilient thanks to its niche market exposure, vis-√†-vis most of the financial services providers that are facing tougher times in growing their loan portfolios amid the current economic condition. We are keeping our gross financing receivables growth assumption rates of c.9% for FY17-FY18. Besides its healthy loan growth, we also like its: (i) decent asset quality with NPL expected to hover between 2-3% (on seasonality), (ii) healthy CAR, which is expected to be at a comfortable 20% vs. Bank Negara Malaysia CAR requirement of 16%, (iii) higher ROE of >20% in FY17E-FY18E as well as (iv) decent dividend yields of 4.5%-4.8% (based on DPR of 38%); which are better than other NBFIs as well as most of the banking stocks.

Maintain OUTPERFORM with an unchanged TP of RM17.76. We made no changes to our earnings estimate. Thus, our TP is unchanged at RM17.76 based on an unchanged targeted 10.0x FY18E PER (which is at +0.5SD above its 5-year mean forward PER). Risks to our call include: (i) steeper margin squeeze, (ii) slower-than-expected financing receivable growth, and (iii) worse-than-expected deterioration in asset quality.

Source: Kenanga Research - 23 December 2016

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