AEONCR’s 1HFY25 net profit (-19% YoY) was below expectations due to unexpected hits to credit cost in spite of new asset quality measures being implemented. We cut our FY25F/FY26F earnings by 16%/2% and lower our GGM-derived TP to RM8.35 (from RM8.55). The stock remains an OUTPERFORM as we view that its long-term ROEs (c.15%) may see further traction post maturation of its AEON Living Zone and digital banking efforts. A results briefing will be held today where we expect more details on the provisions.

1HFY25 disappointed. AEONCR’s 1HFY25 net profit of RM177.6m missed expectations, making up 42% of our full-year forecast and 41% of consensus full-year estimate due to higher-than-expected impairments in 2QFY25, albeit NPL ratio continued to narrow (2.37%, -9 bps QoQ).

YoY, 1HFY25 total income increased by 15% from both higher net interest income (+15%) attributed to a larger financing book (+14%) and well as better overall fees and recoveries. That said, the group incurred higher impairment allowances (gross credit cost at 5.62%, +74 bps) on higher provisions from key motor and personal financing segments. In addition to further associate losses incurred by Aeon Bank, 1HFY25 net profit declined by 19%.

QoQ, 2QFY25 net profit plunged by 33% due to the same abovementioned reasons, although net interest income registered sequential gains (+4%) in line with sustained growth in its financing books.

Outlook. The higher credit cost during the period was a surprise to us as the group had implemented more comprehensive credit assessments via its e-KYC framework and optimisation of its merchant management network. Though this may pose near-term concerns, we opine it will still be well contained albeit with narrower improvements as compared to prior year’s performance as controls are still relatively tighter.

With regards to growth strategies, wider engagement from “AEON Living Zone” offer cross selling opportunities on its captive customer base while also providing a smooth introduction of AEON Bank to the market. However, these channels are expected to carry heavier customer acquisition costs and hence will only likely be strongly accretive to earnings in the medium-term once better scale is reached.

Forecasts. We slash our FY25F earnings by 16% as we raised our prior gross credit cost assumptions from 4.25% to 5.00% to reflect higher asset quality concerns, albeit still lower than FY24’s 5.15%. On a net basis, our FY25 credit cost stands at c.3.5%. Our FY26F earnings are only slightly adjusted by -2%, in anticipation of conditions to normalise in the near- term.

Maintain OUTPERFORM but with a lower TP of RM8.35 (from RM8.55). Our TP is based on an unchanged GGM-derived PBV of 1.4x (ROE: 15%, TG: 1.5%) against a revised CY25F BVPS of RM5.98. While the recent results adds on concerns for near-term earnings on top of protracted losses from AEON Bank, AEONCR’s long-term fundamentals stand toe-to-toe 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) 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 - 27 Sep 2024