This article first appeared in The Edge Financial Daily on October 8, 2018

AEON Credit Service (M) Bhd
(Oct 5, RM16.22)
Maintain market perform with a higher target price (TP) of RM15.80: The group reported a core net profit (CNP) for the second quarter of 2019 (2Q19) of RM77.5 million (-19% quarter-on-quarter [q-o-q]; +14% year-on-year [y-o-y]), bringing CNP for the first half of 2019 (1H19) to RM173.1 million (+23%) which made up 52%/53% of our/consensus full-year estimates. As expected, an interim dividend per share (DPS) of 22.25 sen (on 33% dividend payout ratio [DPR]) was declared. We expect total DPS of 46 sen (DPR of 38%) to be declared in the financial year 2019 (FY19).

Y-o-y, 1H19 total income grew 10%, driven by both stronger net interest income (NII) and other operating income. Note that while net interest margin (NIM) continued to drop marginally to 12.7% (from 12.9%), NII improved by 7%, thanks to stronger growth in gross financing receivables (+12%). Other income improved by 23% on better recovery in bad debts, better commission income from sale of insurance products and loyalty programme processing fees. Positively, CNP improved by a wider quantum of 23% fuelled by better credit charge ratio (CCR) of 4.3% (-0.8 percentage points [ppts]) on lower impairment loss on financing receivables. This was due to the better collection alongside adjustment of the Malaysian Financial Reporting Standard 9. On other key metrics, while NIM continued to be on the downtrend (-0.2ppts to 12.7%), asset quality remained decent as non-performing loan (NPL) ratio improved at 2.07% (versus 2.48% in 2Q18) with the help of the better CCR (4.3%). Meanwhile, capital adequacy ratio remained healthy at about 22%.

On a q-o-q basis, 2Q19 total income grew 8% with stronger other operating income (+33%) masking flat NII (+1%). However, with a higher CCR of 5.4% (+2.1ppts on seasonally higher allowance on impairment losses), CNP dropped 19%.

The group is still showing decent receivables growth of 12% y-o-y, premised on the resilient personal financing demand, which we believe will continue to stay robust on its niche small-ticket market for amounts averaging at about RM10,000. On the margin side, the digitalisation of branch operations is gaining traction. We expect cost-to-income ratio to maintain at 35.4% to 35.5%, which is at the group’s historical three-year range of 34% to 35% despite lower NIM, which will be offset by the better operational efficiency from digitalisation as well as stringent cost control. Meanwhile, collection ratio improvement by leveraging on the group’s stringent customer qualification processes with advanced system adoption should minimise the impact of impairment as well as keeping NPL at a healthy level (of low to mid 2%). We are keeping our forecasted two-year gross loan compound annual growth rate of +11%. On the three-year 3.5% irredeemable convertible unsecured loan stocks (Iculs), note that over 80% of them have already been converted, which has injected RM432 million into the group, helping to build an adequate level of capital buffer and to support continuous business growth. All in, assuming the full Iculs conversion alongside cash injection that supports its gross loan we expect FY19E (estimate)/FY20E earnings per share growth of 12%/11% versus CNP growth of 16%/11%.

While we made no changes to our earnings estimates, we roll over our valuation base year to FY20E, resulting in a higher rollover TP of RM15.80 from RM14.25. This is still based on an unchanged targeted price-earnings ratio (PER) of 11 times being ascribed (on its latest five-year average PER). — Kenanga Research, Oct 5