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This article first appeared in The Edge Financial Daily on May 2, 2018

AEON Credit Service (M) Bhd
(April 30, RM13.08)
Maintain buy with an adjusted target price (TP) of RM14.30:
AEON Credit Service (M) Bhd financial year 2018 (FY18) earnings climbed +13% year-on-year (y-o-y) higher to RM300.1 million. The group’s cumulative earnings accounted for 106.9% and 119.4% of our and consensus expectations respectively, supported by steady progression in interest income of +13.6%. Notably, its biggest segments, namely automobile financing, personal financing and motorcycle easy payment grew at an average of +15.0% y-o-y. On quarterly basis, the group’s third quarter (3QFY18) net profit grew +2.8% y-o-y.

 

Personal financing which accounted for approximately 24% of operating income, recorded a strong growth of +23.2% y-o-y. Meanwhile, both automobile financing’s and motorcycle easy payment’s operating income displayed the same trend, climbing higher by +13.5% y-o-y and +9.6% y-o-y respectively. We believe this healthy improvement stemmed from higher consumer spending during the quarter due to seasonality factors. Overall, income from the group’s core business grew mostly in tandem with our assumption of +14.2% in FY18. In FY19, we are ascribing a high single-digit growth assumption to its net interest income. We believe this is achievable considering the group’s consistent performance of expanding its core income over the years.  

Earnings in FY18 were moderated by higher overall opex which increased +9.7% y-o-y. This was primarily driven by higher funding cost, due to an increase in borrowings of +2.7% in line with the growth of receivables. Despite the higher opex, we take comfort to see its ratio against revenue still trended down, although slightly by -0.3 percentage points y-o-y. Moving forward, we believe the group will continue to strive for a leaner opex management, coming from its value chain transformation. Key to achieving this will be improvement of its branch operation costs, which have been displayed by the significant reduction in overtime (-18.4% y-o-y) and money collection expenses (-91.1% y-o-y).  

This added to a total dividend of 41 sen, which constitutes about 95.3% of our forecast. Accordingly, total dividend paid out was 34% of the group’s earnings.  

Given that the results were above our expectations, we are revising our estimates for FY19. This is taking into account our assumption of +8.4% y-o-y on the growth of operating income, lifting its net profit by +1% y-o-y from our previous estimate.

We maintain our “buy” recommendation on AEON Credit with an adjusted TP of RM14.30, pegging the group’s FY19 book value per share of 6.5 at price-to-book value of 2.2 times. We are ascribing a lower multiple to reflect the potential dilution from irredeemable convertible unsecured loan stock conversion which could potentially put continuous downward pressure to the share price. However, we continue to be optimistic about the outlook for the group’s business based on its value chain transformation journey. In addition, we are positive on the group’s initiatives to improve customer experience via the introduction of e-wallet and e-money cards, in which we opine will improve the customers’ brand loyalty with AEON Credit. Potential rerating for the group’s earnings would be the outcome of upcoming proceedings between Inland Revenue Board and AEON Credit, and lower-than-expected future earnings (from FY20). — MIDF Research, April 30.

 

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