AEONTS - Gradual recovery ahead with sizable cushion

Following the analyst meeting, we maintain our Outperform rating (preferring to buy on weakness) with an unchanged TP of Bt158 on the back of: 1) an expected gradual earnings recovery ahead, 2) a catalyst from expected policy rate cuts and 3) sizable management overlay LLR with some benefit from the government’s Bt10,000 cash handout to vulnerable groups. We believe earnings will gradually recover in 2HFY24 and FY2025, driven by easing credit cost, a pick-up in loan growth and robust growth in non-NII.

Sizable management overlay. As of 2QFY24, AEONTS had management overlay LLR of Bt380mn to cover the impact of flooding, Bt120mn for freezing operations in Myanmar and Bt200mn for the step up in minimum credit card payment to 10%, now postponed from the original schedule of 2025. So far, AEONTS sees limited impact from the flooding and has more than adequate management overlay. It has ~7% exposure to debtors with monthly income of under Bt8,000 who are likely to be eligible for the government’s cash handout of Bt10,000 each that started on Sep 25. In 3QFY24, it will write off Bt400-500mn in NPLs, mostly from the step up in minimum credit card payment to 8% from 5%. It targets NPL ratio at 5-5.5% at YE2024 vs. 5.6% at 2QFY24. We expect lower credit cost HoH in 2HFY24 from 8.92% in 1HFY24, but in FY2024, expect credit cost to rise 63 bps to 8.45% before coming down 5 bps to 8.4% in FY2025.

Resuming loan expansion in 3QFY24. In 3QFY24, AEONTS is going to resume loan expansion but cautiously. In FY2024, it targets loan growth of 3-5% in credit card loans and no more than 3% in personal loans. In 1HFY24, YTD loan growth was 0.1% (-4.2% in credit card loans, +0.6% in personal loans and +23.6% in hire-purchase loans, mainly used car loans).

Good growth in non-NII. We expect non-NII to grow 20% in FY2024 on an 18% rise in bad debt recovery and higher gain on NPL sales of Bt340mn in FY2024 from Bt167mn in FY2023. It had a gain of Bt172mn on the sale of NPLs in 2QFY24 and will sell another batch of NPLs in 4QFY24. It is going to enhance fee income from insurance brokerage via adding one more partner and starting an AMC.

2HFY24 outlook. We expect 3QFY24 earnings to fall QoQ (no gain on NPL sales) but rise YoY (higher non-NII). In 4QFY24, we expect earnings to rise nicely QoQ (gain on NPL sales and lower ECL) but fall YoY (higher ECL). We now expect FY2024 earnings to slip 8%, with 2% loan growth, stable NIM, 20% growth in non-NII (from bad debt recovery, insurance brokerage income and other income) and a 63 bps rise in credit cost.

Maintain Outperform with an unchanged TP. We maintain our Outperform rating with an unchanged TP of Bt158 (1.4x PBV or 12.3x 2025 PE) on the back of: 1) an expected gradual earnings recovery in 2HFY24 and FY2025, 2) a catalyst from potential policy rate cuts and 3) sizable management overlay LLR with some benefit from the government’s Bt10,000 cash handout to vulnerable groups.

Key risks: 1) Asset quality risk from uneven economic recovery, 2) regulatory risk from the BoT’s household debt measures, and 3) ESG risk from market conduct.