Aeon Credit Service (M) Bhd
(June 28, RM16.80)
Maintain hold with an unchanged target price (TP) of RM14.85: Aeon Credit Service (M) Bhd’s (ACSM) earnings in the first quarter of financial year 2020 (1QFY20) was dragged down by higher impairments and finance costs — net profit declined by 15% year-on-year (y-o-y) (-3% quarter-on-quarter [q-o-q]).
On the other hand, revenue growth was a steady 16% y-o-y (+5% q-o-q), underpinned by strong receivables growth of 23% y-o-y (+5% q-o-q). Annualised return on equity (ROE) was 22% as a result of the lower y-o-y net profit (1QFY19: 26%). All in, the company’s performance was broadly within our and consensus expectations at 22% of FY20 forecasts.
ACSM’s receivables growth during the quarter continued to be driven by its vehicle financing (+29% y-o-y; +16% q-o-q) and personal financing (+32% y-o-y; +6% q-o-q). Estimated yields fell y-o-y, likely due to the ongoing shift of ACSM’s customer profile towards the Middle 40% segment. Coupled with a larger debt load (+24%) and higher finance costs (+29%), estimated net interest margins contracted by around one basis point y-o-y.
ACSM’s higher impairments y-o-y mainly originated from write-backs recorded in 1QFY19 in conjunction with the implementation of the Malaysian Financial Reporting Standards 9 (MFRS 9). Otherwise, expected credit loss allowances improved on the back of better collection trends. Other operating expenses were 20% higher from depreciation (rose by 93% due to implementation of MFRS 16) and advertising expenses (+11%).
Vehicle and personal financing will remain ACSM’s primary receivables growth engines, though yields could moderate further as the company transitions towards higher income customers for better asset quality.
This has been evident in the company’s improving non-performing loan ratio of 1.92% against 2.26% a year ago and 2.33% in FY18. ACSM’s digital initiatives are still very much in their infancy and would need more time to build scale.
We maintain our earnings forecast and TP for now. Our TP is based on the Gordon Growth Model assuming 20% ROE, 4% long-term growth and 12% cost of equity. — AllianceDBS Research, June 28