This article first appeared in The Edge Financial Daily on December 23, 2019

AEON Credit Service (M) Bhd
(Dec 20, RM14.70)
Maintain neutral with a lower target price (TP) of RM15.50: AEON Credit Service (M) Bhd recorded a net profit decline for the first nine months of its financial year of 2020 (9MFY20) of 22.8% year-on-year (y-o-y), below expectations. The net profit was at 67.4% and 66.8% of our and consensus full-year estimates respectively. The variance was due to our underestimation of the rise in operating expenses.

Operating expenses for 9MFY20 grew 36.6% y-o-y due to higher impairment loss. This was the result of early recognition of impaired receivables as required under Malaysian Financial Reporting Standard 9 (MFRS 9). Provisions came in 69.6% y-o-y higher to RM362.5 million. However, the higher provisions were due to the strong expansion in financing receivables.

The higher financing receivables also resulted in strong growth in revenue. It grew 17.8% y-o-y to RM1.19 billion and was led by the credit card, motorcycle, auto and personal financing segments.

Gross financing receivables expanded 4.5% quarter-on-quarter (q-o-q) and 20.7% y-o-y to RM10 billion as at end of its third quarter (3QFY20). The main drivers were the strong growth in credit card, motorcycle, car and personal financing. These grew 25.9% y-o-y to RM880 million, 27.4% y-o-y to RM3.08 billion, 17% y-o-y to RM2.85 billion and 20.8% y-o-y to RM2.81 billion respectively.

Non-performing loan ratio improved by -7 basis points (bps) q-o-q and -14bps y-o-y to 1.93%. We noted that asset quality have been very healthy for the past couple of years. Meanwhile, current collection ratio remains high at 98%.

We are revising our FY20 and FY21 forecast downwards by 9.6% and 8.9% to account for the higher operating expenses.

While we noted that AEON Credit managed to maintain its strong revenue growth momentum, its high operating expenses continue to weigh on its earnings. The strong growth in financing receivables suggests that there is still demand for its financial products with strong asset quality. However, there will be should there be a slowdown in economic growth. Hence, we maintain our “neutral” call. We revised our TP to RM15.50 (from RM15.60) due to our revision in earnings. We peg AEON Credit’s FY21 book value per share of RM7.60 to price-to-book value (PBV) of 2.1 times (one standard deviation below of its five-year average PB ratio). — MIDF Research, Dec 20