Aeon Credit Service (M) Bhd
(July 6, RM13.44)
Maintain buy with a target price of RM16.10: We view Aeon Credit Service (M) Bhd as a superior alternative to the banking sector (which is facing weaker earnings growth and returns) on the back of robust receivables growth of more than 20% per annum (pa); and return on equities (ROEs) above 20% against the banking sector’s 11% to 12%.

Aeon Credit continues to benefit in market segments where banks generally do not focus on, underpinned by good merchant tie-ups and secured by a high effective interest rate receivables portfolio against a low debt-funding cost of 3.8% (first quarter of financial year 2016 [1QFY16]).

We expect receivables growth to gradually improve driven by new initiatives such as the expansion of personal financing loans to the higher-income group; cross-selling initiatives with Aeon group (insurance, credit cards, general easy payments); new service centres/merchants.

As at 1QFY16, Aeon Credit’s asset quality remained solid, with a gross non-performing loan ratio of 2.74% versus 2.76% in 4QFY15 driven by increased collection efforts, resulting in higher recovery of bad debts in 1QFY16.

Meanwhile, the non-performing receivables coverage stood at 107.8% as at May 2015.

Aeon Credit which reported a 1QFY16 net profit of RM54.7 million, was in line with our estimates. We believe that the absence of an unexpected rise in allowances and a higher recovery rate (versus FY15) will underpin a more stable earnings outlook in FY16. We maintain our “buy” rating on Aeon Credit, with a TP of RM16.10, based on a 9 times price-earnings ratio calendar year 2016 earnings per share of 179.5 sen.

We remain confident that the asset quality and pipeline of receivables growth remain intact for 2016, despite a slower start in 1QFY16, driven by key segments such as motorcycles and used cars. Key risks include further deterioration in consumer sentiment and high household debt-to-gross domestic product. — AffinHwang Capital, July 6.

This article first appeared in The Edge Financial Daily, on July 7, 2015.