AEON Credit Service (M) Bhd
(April 10, RM8.98)
Maintain sell with an unchanged target price (TP) of RM6.30: Overall, the financial year ended Feb 29, 2020 (FY20) results were below our expectations by 7.9% (variance in higher funding cost), though within street estimates. Meanwhile, for FY21 estimated (FY21E) earnings, we expect net earnings to decline by 24.2% year-on-year (y-o-y) due to higher provisions (353 basis points [bps] in net credit cost) and a 4% y-o-y decline in outstanding receivables. Recently, the company had offered a one-month deferment period in April 2020 for objective, personal, motorcycle and auto-financing customers (who are not more than 90 days overdue) in order to ease cash flow burdens. We maintain “sell” with a TP of RM6.30.
AEON Credit Service (M) Bhd’s FY20 profit after tax (PAT) (for ordinary shareholders) declined by 19.5% y-o-y to RM274.4 million, subsequent to higher operating expenses (in particular higher receivables impairment for the second quarter of FY20 [2QFY20]) while overall funding cost also jumped (+30% y-o-y) as receivables grew by 19.6% y-o-y. The FY20 earnings before interest and tax margin declined y-o-y from 53% to 44.8% (due to higher operating expenditure). For FY20, AEON Credit saw a 46% y-o-y increase in provisions (credit cost: 341bps for FY20 versus 216bps for FY19) due to seasonal factors (during the Raya festival), write-offs and for new receivables accounts secured. For 4QFY20, PAT (for ordinary shareholders) rose 14.5% quarter-on-quarter (q-o-q) as receivables provisions were lower, while 4QFY20 operating profit improved (+11.8% y-o-y; +17% q-o-q) in-line with receivables growth (+3.6% q-o-q).
AEON Credit’s key receivables growth drivers were from motorcycle financing (+40% y-o-y), auto financing (+18.7% y-o-y) and personal financing (+17% y-o-y). FY20’s average receivables yield declined marginally from 15% in FY19 to 14.7% in FY20 as AEON Credit focused on expansion towards the middle 40% income group (slightly lower interest rates versus the bottom 40% income group). The non-performing loans ratio saw an improvement to 1.92% (4QFY20) from 2.04% in 4QFY19.
We reiterate “sell”, with our TP unchanged at RM6.30 (based on a price-earnings ratio target of 6.8 times for 2020 estimated earnings per share of 92.5 sen). We anticipate a recessionary year in FY21 (our gross domestic product forecast is at -3.5% for 2020), arising from the negative impact on business activities following expectations of a prolonged Covid-19 outbreak. We foresee AEON Credit’s receivables declining by 4% y-o-y and a higher net credit cost (353bps). Upside risks include an improvement in credit quality and stronger receivables growth. — Affin Hwang Capital, April 10