AEON Credit’s 1HFY18 core net profit of RM140.4m (+26% yoy) was above our expectations by 11% (due to higher recoveries and lower funding cost). Receivables continued to grow at a robust rate of 16% yoy, of which is just slightly below our FY18’s forecast of 17.4%. Asset quality remained steady in 2QFY18, as reflected by a marginal uptick in gross NPL ratio to 2.48% from 2.43% in 2QFY17, while annualized credit cost declined by 25bps yoy to 342bps. An interim dividend of 21.1 sen was proposed. Upgrade to BUY (from SELL), with a revised Price Target of RM14.25 (on a revised P/E of 11x).

1HFY18 Results Above Our Expectations, Core Net Profit Up 26% Yoy

AEON Credit saw a 26.4% yoy growth in 1HFY18 core net profit as interest income continued to expand at a robust rate of +16.6% yoy while fee income grew at +8.3% yoy. 1HFY18 recoveries was also higher by 11% yoy though was partially offset by higher operating expenses (+9.5% yoy) and finance cost (+17.3% yoy). Receivables net credit cost trended lower by 25bps to 342bps yoy as a result of improved recoveries. AEON Credit saw robust receivables growth of 16.2% yoy, while sequentially grew at 4.7% qoq (with annualized growth at 13.8% vs. our FY18E projection of 17% yoy). Overall, 1HFY18 annualized net profit beat our full year FY18E core net profit of RM253.3m, while coming in within consensus estimates.

Qoq, Profits Declined Due to Lower Recoveries and Finance Cost

On a qoq basis, core net profit declined by 5.6% as recoveries were lower, while operating expenses and finance cost edged up by 5% and 3.6%.

Upgrade to BUY (from SELL), Price Target Raised to RM14.25

We Upgrade Our Recommendation From SELL to BUY, With a Higher PT of RM14.25 (based on an 11x PER on CY18E EPS of 129.6 sen) from RM9.80 (based on 8x P/E multiple) as we revise our FY18-20E core net profit up by 2.5-5% on the back of higher recoveries and lower interest expense. Our price target P/E assumption was raised as we peg our valuations to the average P/E multiple a year ago to better reflect its trading multiple. Our assumption of 17.2%, 14.5% and 12% yoy on FY18- 20E receivables growth remain unchaged. Downside risks: deterioration in consumer sentiment, decline in credit quality (resulting in higher NPLs).

Source: Affin Hwang Research - 6 Oct 2017