• Keep BUY, with a new MYR14 TP from MYR14.60, 25.4% upside and c.4% yield. In yesterday’s analysts’ briefing, AEON Credit Service’s management retained its cautiously optimistic tone and outlined detailed steps to ensure its asset quality metrics improve over the coming quarters. An encouraging take-up of financing products from customers with good credit scores is also positive for the long-term performance of the group.

• Financing growth momentum to continue. Recall that gross financing receivables increased 12% YoY in 1QFY24 (Feb), tracking ahead of management’s 10% target for the year. The group expects the strong momentum to continue, with personal and motorcycle financing being key drivers. Receivables growth should also benefit from AEON Credit’s new AI-backed credit scoring model, which aims to improve turnaround times and reduce exposure to high-credit-risk customers.

• Temporary NPL spike. We understand that the group’s NPL ratio was impacted by the Aidilfitri festive period, as borrowers prioritised spending on festivities over repayments. Moving forward, the group’s refreshed focus on customers with good credit scores should begin to translate to better NPL ratios in 3-6 months’ time. Management expects the NPL ratio to ease to below 3.0% from 3.13% in 1QFY24. This should also help to keep LLC at the higher end of the group’s 200-250% comfort range (1Q LLC: 227%) without having to significantly increase provisions. The group is also sitting on c.MYR90m of management overlays as buffer.

• Credit costs within expectations. Net credit cost of 3.9% incurred in 1Q fell within expectations, though management is working on measures to bring the cost down. These include early outsourcing of past-due accounts to external collection agencies before they are written off as bad debts. The group has also implemented a risk-based collection approach to prioritise higher-risk customers, while reviewing incentive schemes to improve collection productivity. These measures have led to decent results so far, as recoveries increased 5% QoQ in 1Q.

• Favourable risk-reward ratio. After a c.12% YTD drop in its share price, ACSM is currently trading at c.1.0x P/BV, close to -2SD from its 5-year mean and the lowest multiple among non-bank lenders under our coverage. On the other hand, we are still confident in the group’s ability to deliver earnings, with our forecasted ROE of 17% for FY24F being the joint-highest ratio among its peers. Thus, we consider the risk-reward profile for the counter favourable.

• We trim FY24-26F by 1-3% as we factor in more conservative credit cost assumptions in line with the YTD performance, though this is partially mitigated by higher receivables growth and non-II assumptions. Our GGM- derived TP is lowered to MYR14.00 and includes an unchanged 2% ESG premium.

Source: RHB Research - 12 Jul 2023