This article first appeared in The Edge Malaysia Weekly, on January 11 - 17, 2016.

AEON Credit Service (M) Bhd showed resilience despite the weak consumer sentiment that prevailed last year.

It held up well in its last three financial quarters and seems optimistic about maintaining its performance in its fourth quarter ending Feb 29.

At its current share price level, the dividend yield is 4.8%, which is on a par with or even higher than that of some full-fledged financial institutions in the country. The credit service company recently announced an interim dividend of 29.85 sen per share.

However, over the year, the counter has fallen 17% from a 52-week high of RM14.32 recorded on April 27 to RM11.70 at the present time. This could be an indication of concerns about AEON Credit’s prospects, especially since non-performing loans (NPLs) tend to creep up when the economic weather gets harsh.

While the company’s dividend yield appears attractive, if the weak consumer sentiment persists, AEON Credit may not be able to continue to produce steady profit growth.

Still, judging by its track record of delivering consistent profit growth over the last five years, investors have little to worry about.

AEON Credit’s loan growth, though, hit a bump in FY2015, declining to 27% from more than 50% in FY2014 and FY2013, observes AllianceDBS Research in a report. The research house forecasts loan growth at 18% in FY2016 and FY2017.

In an email reply to questions from The Edge, AEON Credit says it has already felt the impact of weak consumer sentiment, especially in consumer durables and vehicles, alongside other non-essential spending.

“However, based on the company’s business strategies, it has maintained year-on-year growth in the car financing, superbike financing and personal financing segments,” it adds.

The company also stumbled in its efforts to generate growth. Last November, it faced an angry backlash from the public when it placed a personal loan advertisement that pictured a happy couple on their wedding day with the headline, “Plan Your Dream Wedding. Borrow up to RM100,000.”

The advertisement was seen to encourage borrowing for a lifestyle that was beyond one’s means. AEON Credit quickly withdrew it, apologising to the public and emphasising that it practised responsible financing.

According to AllianceDBS Research, personal financing accounts for about 20% of the company’s loan portfolio and revenue. The chunk of it, at 56%, is derived from the company’s easy payment scheme for motorcycles and mainly used cars. Its general easy payment scheme makes up 14% of the loan portfolio and credit cards, 12%.

Now, the key growth driver for AEON Credit is its vehicle easy payment scheme and it will continue to be so going forward. “There has been favourable market response since we started promoting car financing aggressively less than four years ago, although our market share is still quite small. Our revised scheme for superbike financing since 2014 has also seen good response,” says the company, adding that it expects to maintain healthy growth in its personal financing and credit card portfolios. Management is also making an effort to drive recovery in the transaction volume of the general easy payment scheme because it is counting on improved consumer sentiment this year.

For the cumulative nine months ended Nov 30, 2015, the company’s net profit grew 5.3% to RM160 million from RM152 million during the nine-month period ended Nov 20, 2014. Revenue rose to RM706.94 million from RM626.43 million in the previous corresponding period.

Analysts believe AEON Credit has carved a niche for itself in the vehicle easy payment segment, which is generally neglected by banks because of the smaller transaction value.

AllianceDBS Research comments that while AEON Credit enjoys high yields from its motorcycle loans, it also bears high risk. The company’s NPL ratio had edged up to 2.68% as at Nov 30, 2015, from 2.58% as at Aug 31.

When asked if the company can keep its NPL ratio low in the light of the poor market, AEON Credit replies that it expects to maintain the overall ratio at close to the current level in FY2016 ending Feb 29.

Kenanga Research forecasts that the NPL ratio will likely hover around 2.5% to 3% as economic conditions have remained unchanged so far. The research house adds: “We expect AEON Credit’s financing receivable growth to taper, mirroring the slowdown in domestic consumption post-Goods and Services Tax implementation and the challenging economic conditions with consumers likely to rein in their spending.”

Whether or not AEON Credit is able to continue its net profit growth remains to be seen but one thing is for sure: the slower economic growth forecast for 2016 will prove to be a challenge for the credit service company.

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