AEON Credit’s (AC) FY18 profit-after-tax (PAT) of RM286.4m (+13.9% yoy) was above our expectations (+7.7%) though in-line with consensus estimates. The results surprised us on the amount of credit recoveries, though overall outstanding receivables growth had tapered-off a little to 11% yoy in FY18 vs. 18.9% yoy in FY17. Nonetheles, AC’s effective yield still held up at a decent level of 15.4% while gross NPL ratio hovered at 2.33% as at Feb18. A final DPS of 20 sen has been proposed this quarter, about 20% lower than our expectations. Maintain BUY, noting that AC is a high-growth, high-return financial stock, with an expected FY19E ROE at 15.6%.

FY18 Results Above Affin’s Expectations, PAT Up 13.9% Yoy

AC saw a 13.9% yoy growth in FY18 PAT (ordinary shareholders) of RM286.4m as interest income (at an average yield of 15.6%) continued to expand at a robust rate of +13.7% yoy while fee income was relatively flat yoy. Stronger credit recovery also drove 4QFY18 earnings higher, as PAT to ordinary shareholders grew by 18% qoq. Overall operating expenses and finance cost grew higher by +9.7% yoy and +13.6% 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 FY18 stood at 59.5% vs. FY17 at 60.5%. Meanwhile, based on receivables credit cost estimates, FY18 stood at 316.3bps, which is relatively steady vs. 312.6bps in FY17.

Management Defends Stance on Additional Tax Bill

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 challenge the validity of the notices of additional assessment raised by the Director General of Inland Revenue. At this juncture, AC had filed an appeal to the Court of Appeal against the High Court’s decision on 5 Mar18.

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). Downside risks: deterioration in consumer sentiment, decline in credit quality (resulting in higher NPLs).

Source: Affin Hwang Research - 30 Apr 2018