AEONCR: Hit by Compliance with MFRS 9

Result Update

For QE31/8/2019, AEONCR's net profit dropped 42% q-o-q or 39% y-o-y to RM49 million while revenue rose 7% q-o-q or 21% y-o-y to RM404million. Pre-tax profit dropped 41% q-o-q to RM67 million mainly due to higher impairment losses of RM154.692 million recorded for the quarter ended 31 August 2019 as compared to RM93.338 million for the immediate preceding quarter in compliance with MFRS 9 requirements.

There is no comment made as to whether loan quality has deteriorated. The company continued to pay the same amount of dividend of 22.25 sen as last quarter (QE31/8/2018). Thus, we can conclude that it is likely that the profit drop is purely due to change in accounting practice. (Note: MFRS 9 requires banks or finance companies to change the way they make loan loss provisions. They will have to make provisions in anticipation of future losses rather than the current practice of making provisions only when loans have been classified as impaired. For more on MFRS 9, go here.)


Table: AEONCR's last 8 quarterly results


Graph: AEONCR's last 53 quarterly results

Financial Position

AEONCR's financial position is deemed acceptable with current ratio at 1.1 times while gearing ratio is elevated 4.2 times.

Valuation

AEONCR (closed at RM14.96 yesterday) is now trading at a PE of 13 times (based on last 4 quarters' EPS of 115 sen). At this PER, AEONCR is deemed fairly valued. In addition, it pays a decent dividend with DY of 2.98% (based on last year dividend of  44.60 sen).

Technical Outlook

AEONCR is in an uptrend. Its immediate support is the horizontal line at RM14.50. Due to the sharp drop in reported profits, it is likely that AEONCR may break the uptrend line. If so, we can look to the support at the horizontal line at RM13.50-13.70.


Chart: AEONCR's weekly chart as at Sep 26, 2019 (Source: Malaysiastock.biz)

Conclusion

Despite the drop in reported profits, AEONCR is still a good stock for long-term investment in view of its fair valuation and still positive technical outlook. However, I would revise to rate to REDUCE in view of negative market perception that may accompanied its sharply lower profits reported.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.