AEONCR's 9MFY25 net profit (-22% YoY) was below expectations due to credit cost pains prolonging in its key portfolios, although total revenues had delivered as expected. We cut our FY25F/FY26F earnings by -16%/-4% to reflect further drags from impairments and lower our ROE assumptions in our GGM. This led to a lower TP of RM7.00 (-16% from RM8.35) but maintain our OUTPERFORM call for AEONCR as its longer-term prospects are still intact with the support of its AEON Living Zone ecosystem and Aeon Bank's eventual carry-of-peer products.

9MFY25 missed expectations. AEONCR's 9MFY25 net profit of RM359.6m made up 67% of our full-year forecast and 59% of consensus full-year expectations. The negative deviation was driven by higher-than-expected impairments of which we await for clarity on its nature in today's results briefing. We suspect this is attributed to the group's quicker onboarding of new customers which temporarily inflates its staging needs. That said, we note that its NPL ratio still showed an improvement at 2.42% (-24 bps YoY), thanks to its larger receivables book.

YoY, 9MFY25 total income grew by 14% on the back of both higher net interest income (+15%), supported by a larger financing book (+15%), in addition to stronger overall fees and recoveries (+11%). However, net earnings declined by 22%, no thanks to higher overall provisions with a gross credit cost of 5.89% (+56 bps) absent writebacks in 9MFY24. Net credit cost for the period was 4.24% with loan loss coverage sitting at 231%, edging close to the group's comfortable level of above 230%.

Meanwhile, Aeon Bank drew associate losses of RM45.5m to AEONCR which is within the guided losses of RM60m during its inception year. Stripping this would have led to a narrower earnings decline of 7%.

QoQ, 3QFY25 net profit slipped by 13% with impairment losses still remaining lofty in spite of 2QFY25 incurring added provisions from the group's updated LGD model. CIR did increase slightly to 36.6% (+0.7 ppt) as expenses broadly picked up, perhaps in line with the ramping-up of year-end seasonality.

Outlook. AEONCR's efforts to tighten its asset quality via more comprehensive credit assessments, analytics and recovery efforts could narrow its NPL ratio albeit at the cost of more top-ups to provisions along the way. We note that this is the second consecutive surprise on provisions with its LGD model updates now expected to be more recurring in nature, which could further dampen earnings visibility in the short run (albeit at a smaller magnitude from 2QFY25's RM30m impact). Meanwhile, more investments and customer acquisition costs are required in the near term to fuel its AEON Living Zone ecosystem to boost cross-selling opportunities.

We take solace that Aeon Bank's losses remain well contained and within the expected run rate of RM60m/year until it begins to generate revenue.

Forecasts. We cut our FY25F/FY26F earnings by -16%/-4% as we raise our gross credit cost assumptions from 5.00%/4.25% to 5.50%/4.75% in anticipation of further BAU provisions by AEONCR with fewer writebacks in mind. Our revised net credit cost stands at 4.1%/c.3.0%.

Maintain OUTPERFORM but with a lower TP of RM7.00 (from RM8.35). In addition to our abovementioned trimmings, we opted to lower our applied GGM-ROE from 15% to 13%, being in line with the group's near-term guidance. This is an even steeper discount from AEONCR's 5-year average ROE of 17%, which we believe will see challenges in replicating in the near-term given the increasing volatility of the group's credit cost situation. We arrive at a revised GGM-derived PBV of 1.2x from 1.4x (TG: 1.5%) against CY25F BVPS of RM5.89.

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 - 20 Dec 2024