We maintain our OUTPERFORM call and GGM-derived PBV TP of RM8.35. AEONCR’s recent impairment surprise arose from a refresh of its Loss Given Default (LGD) model inputs and will be revisited on a periodic basis. While the group will likely incur more marketing spend to support its new customer acquisition efforts, we take comfort that Aeon Bank has retained a strong base of sticky customers and is slated to cross sell in the near-term. Our forecasts are unchanged.

AEONCR hosted its 2QFY25 results briefing. Key takeaways are as follows:

- Pinch in credit cost could hinder short-term earnings. With regards to 2QFY25’s higher-than-expected ECL, the group clarified that it was due to updates in its LGD model to reflect the sale of off- balance sheet recoveries (which we understand in simpler terms is an update in its provision model an estimate for recoveries from accounts that have been off its books, as loans are written off after being 9 months in arrears). This led to an additional RM30m of impairments, which without would have kept 1HFY25 earnings to be within expectations (at 49% of our pre-revised FY25F earnings).

As of Aug 2024, a remaining RM2.8b in off-balance sheet delinquencies are still seeking monetisation, albeit the group expecting their sale to be gradual and thereby limiting the impact of similar LGD refresh in the coming financial years.

- CIR may end on a higher note. Anticipating stronger promotional needs in 2HFY25, the group is eyeing for its CIR target of 30% to be breached. Fuelling up operating expenses is also collection-related incentives from both internal staff and collection agents, which we also believe is warranted as the group commenced trials for their enhanced risk-based collection approach.

- Aeon Bank on track with its milestones. Since its launch, Aeon Bank has retained an active user base of 80k of which 60% are new customers to the Aeon ecosystem. The bank did see a plunge from its peak deposits base of RM800m to RM300m, largely due to yield- seekers expectedly moving withdrawing their funds following the end of its campaign launch. That said, this is still above its deposits target of RM200m. Aeon Bank is slated to introduce peer products by Dec 2024, which is also within the expected timeline for the group. On that note, the wider QoQ losses from Aeon Bank of RM18.7m (1QFY25: RM11.6m) was no surprise as it was launched in the month of May followed by higher introductory rates offered in subsequent months.

Forecasts. Maintained.

Maintain OUTPERFORM and TP of RM8.35. Our TP is based on an unchanged GGM-derived PBV of 1.4x (ROE: 15%, TG: 1.5%) against CY25F BVPS of RM5.98. While the recent results add 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 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) higher-than-expected impairment losses, (iii) lower-than- anticipated write-backs, and (iv) wider-than-expected losses from Aeon Bank.

Source: Kenanga Research - 30 Sep 2024