This article first appeared in The Edge Financial Daily on June 19, 2018
Aeon Credit Service (M) Bhd
(June 18, RM14.30)
Maintain buy rating with a higher target price (TP) of RM18.40: Aeon Credit Service (M) Bhd’s management had in the past one to two years undertaken initiatives, which included a value-chain transformation exercise, which focuses on enhancing the bottom line of the group as well as boosting the profitability of its receivable portfolios and credit recoveries. We saw a continuous pickup in credit card spending and personal financing growth, lower operating expenses, improved collection and firmer margins — better than we initially anticipated. The potential adoption of AI and automation processes will lower overheads in our view.
Aeon Credit is looking to expand its target market further beyond the B40 group (bottom 40% of Malaysian households). Though this will be positive for Aeon Credit to outperform that of financial year 2018’s (FY18) receivables growth of 11% year-on-year, the lower-risk concentration receivables however will not justify for returns higher than its average yield of about 18% in FY18. Nonetheless, a sound receivables book will underpin a steady credit cost level (our estimates: 315 to 336 basis points [bps] for FY19 to FY21 versus 327bps for FY18) under Malaysian Financial Reporting Standard 9 adoption.
We raise our FY19 to FY21 earnings per share forecasts by +10%/+15.9%/+9% due to lower operating expenses (revised down by 2% to 7% on lower staff costs, provisions and impairments), lower funding cost (as we reduce our overall debt estimate), firmer receivables yields of 15.2% to 16.5% (from 15.4% to 15.7%) and lower net credit cost of 315 to 336bps (from 309 to 377bps).
As such, we revise our TP to RM18.40 based on an unchanged 13 times price-earnings multiple on calendar year 2019 estimated (CY19E) earnings per share of 141.5 sen (rolled over from CY18). We maintain our “buy” rating on Aeon Credit given an attractive upside potential of 25%. At RM14.46, Aeon Credit is trading at a FY19E to FY20E price-earnings multiple of 11.3 times (as at June 14, 2018), above its 10-year average of 8.4 times.
We believe Aeon Credit’s share price may continue to be rerated, given the current initiatives implemented by the company to enable it to scale up and move up the value chain of the business. We note that Aeon Credit is a high-growth, high-return financial stock, an alternative to banking stocks and with a return on equity in the mid-teens.
Key risks to our call include weakening consumer sentiment in the country and central bank measures to limit household debt growth. — Affin Hwang Capital, June 18