Challenging times ahead for Aeon Credit

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Aeon Credit Service Bhd
(Dec 12, RM11.44)
Maintain “hold” with a target price (TP) of RM11.40:
Aeon Credit’s share price fell 29% since its second quarter of financial year 2015 (2QFY15) results due to concerns of asset quality risk which was further aggravated by the weaker outlook for the domestic economy.

Going forward, we expect the operating environment to remain tough amid softer consumer sentiment. We continue to keep an eye on non-performing loan (NPL) ratios as further asset quality deterioration could pose downside risk to earnings.

We cut our FY15 to FY17 forecast earnings by 7% to 19% as we impute higher credit costs of 4.3%, 4.4% and 4.5% (from 4.2%, 4.3% and 4.4%) and lower our yield assumptions by 77, 119 and 146 basis points (bps).

FY15 forecast loan growth target is maintained at 29%, a slowdown from 52% in FY14.

We expect Motorcycle Easy Payment (MEP) and Car Easy Payment (CEP), which account for some 50% of Aeon Credit’s loan book, to continue to drive its loan growth. Although MEP growth moderated to 6% quarter-on-quarter (q-o-q) in the second quarter, versus 9% in the first quarter, motorcycle registrations have picked up since, which should improve loan momentum going forward.

However, we remain cautious about the possibility of Bank Negara imposing further tightening measures on consumer financing (personal loans and credit card) in an attempt to curb excessive household  indebtedness.

Following the cut in earnings, our TP is revised down to RM11.40, based on 8 times calendar year earnings per share, previously 10 times which represents its five-year average price-earnings (PE) multiple. We have switched our valuation method to PE from price earnings to growth, as growth prospects have dimmed. — AllianceDBS Research, Dec 11

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This article first appeared in The Edge Financial Daily, on December 15, 2014.