EON Capital

EON Capital: After our earnings revision, EON Cap is trading at an undemanding 0.84x and 9.2x FY10 PBV and PER respectively, representing a steep 43% discount to the industry average of 1.48x PBV (ex-Public Bank). We are raising our target price from RM5.60 to RM6.00, based on an unchanged 1.1x historical mean PBV but pegged at a higher book value of RM5.45/share. Given its undemanding valuations, improving asset quality and hence scope for upwards earnings revision on the back of lower credit costs we are upgrading our recommendation from TRADING BUY to BUY. Capital management initiatives could surprise on the upside providing a further rerating catalyst.

1HFY09 results boosted by lower provisions and tax. 1HFY09 results represented 92.6% and 96.4% of consensus and our full-year forecast. The significantly stronger than expected results were largely attributed to: 1) deferred tax write-back, which brought the 1HFY09 effective tax rate down to only 6.9%, and 2) lower than expected loan loss provision (-76.9% y-o-y and +15.2% q-o-q). On a normalised effective tax rate basis, the 1HFY09 annualised earnings were still 44% and 46% above consensus and our full-year numbers, largely as a result of lower than expected loan loss provisions.

Stabilising NIMs, strong Islamic banking income drive q-o-q growth. Pre-provision operating profit declined 10.0% on the back of lower net interest income (-3.1% y-o-y) and higher operating expenses (+7.3% y-o-y). However, on a q-o-q comparison, profit before tax expanded 5.0% on the back of a recovery in NIMs from the re-pricing of its remaining FDs, stronger q-o-q loans growth (+0.95%) and a 25.3% q-o-q surge in Islamic banking income.

Loans growth below expectations. Annualised 1HFY09 gross loans grew by 3.1% y-oy, below our full-year forecast of 4.0% and well below management’s 6% guidance. The business loans segment was the main drag, contracting 5.0% y-o-y, while household loans grew 5.4% y-o-y. Within the household loan segment, housing loans grew 7.5%, HP, 3.6% and credit cards, 16.9%. We are maintaining our full-year loans growth forecast of 4.0% but raising our FY10 loans growth forecast from 5.5% to 7.0% as we believe that management is likely to drive growth more aggressively as it enters the second phase of its transformation process, which among others, could involve greater cross selling efforts. Management has set an 8% loans growth target for FY10.

Major Shareholders (%)
Primus Pacific Partners 20.2
RH Development Corporation 16.3
EPF 11.1

52 week H | L Price (RM) 4.94 2.55

EON Capital is a full-fledged financial institution with principal activities that include commercial banking, investment banking, treasury and others.

By OSK188
Analyst: Keith Wee