AEON Credit’s (AC) 9MFY18 profit-after-tax (PAT) of RM207.1m (+18.7% yoy) was within our and consensus estimates. Receivables continued to grow at a robust rate of 13% yoy. Asset quality remained steady in 3QFY18, as reflected by a relatively steady gross NPL ratio of 2.48% on a sequential basis. Meanwhile, credit cost for 9MFY18 was stable on a yoy basis, at 335.4bps. No dividends are proposed this quarter, but we anticipate a final dividend of 25.7 sen. Maintain BUY, noting that AC is a high-growth, high-return financial stock, with a 9MFY18 ROE at 22%. Despite news of AC being slapped with a RM96.8m additional tax bill, management is of the view that the company has strong legal grounds to defend its position, and hence no provision is expected.

9MFY18 Results Within Expectations, PAT Up 18.7% Yoy

AC saw a 18.7% yoy growth in 9MFY18 PAT (ordinary shareholders) to RM207.1m as interest income (at an average yield of 15.7%) continued to expand at a robust rate of +13% yoy while fee income grew at +4.4% yoy. The results were partially offset by higher operating expenses (+11% yoy) and finance cost (+14.9% yoy), in line with business volume growth. Based on the cost-to-income ratio (CIR) metric, there was some improvement on a yoy basis, whereby 9MFY18 stood at 59.5% vs. 9MFY17 at 61.2%. Meanwhile, based on receivables credit cost estimates, 9MFY18 stood at 335.4bps, which is relatively steady vs. 336.5bps in 9MFY17.

Profit Declined Qoq Due to Higher Expenses

On a qoq basis, PAT declined by 1.8% as operating expenses (due to transformation costs) edged up by 3.0% on the back of flat revenue growth.

Maintain BUY; Price Target Unchanged at RM15.30

Maintain BUY with an unchanged Price Target of RM15.30 (based on a P/E target of 13x on CY18E EPS). We note that AC’s share price may potentially re-rate due to the ongoing digital transformation (mobile wallet/ewallet/cashless and paperless branches), marketing initiatives (acquisition of merchants) and 2% income tax reduction for the lower income group (under Budget 2018) which, in our view, are game changers for the company in FY19. Downside risks: deterioration in consumer sentiment, decline in credit quality (resulting in higher NPLs).

Source: Affin Hwang Research - 22 Dec 2017