Aeon Credit (AC) is on track to deliver more solid performance over FY19-21E, and in view of this, we raise earnings by 9-16% while upgrading our target price from RM15.30 (CY18-based) to RM18.40 (based on 13x P/E target on CY19 EPS). This is premised on the positive outcomes anticipated under the company’s value-chain transformation project, income optimization initiatives and growing its receivables, as well as expansion of the higher-yielding settlement business (credit cards). The adoption of MFRS 9 may cause some fine-tuning in product focus, but management has indicated that the balance sheet Day-1 adjustment was not an issue. Maintain BUY.

Update of Recent Initiatives – Concrete Results Seen

AC’s management had in the past 1-2 years undertaken initiatives, which amongst others included a value-chain transformation exercise, which focuses on enhancing the bottomline of the group as well as boosting the profitability of its receivable portfolios and credit recoveries. We saw a continuous pick-up in credit card spending and personal financing growth, lower operating expenses, improved collection and firmer margins - better than we initially anticipated. The potential adoption of AI and automation processes will lower overheads, in our view.

Striking a Balance Between Receivables Growth and Credit Quality

AC is looking to expand its target market further beyond the B40 group (bottom 40% of Malaysian households). Though this will be positive for AC to outperform that of FY18E’s receivables growth of 11% yoy, the lowerrisk concentration receivables however will not justify for returns higher than its average yield of circa 18% in FY18. Nonetheless, a sound receivables book will underpin a steady credit cost level (our estimates ~315-336bps for FY19-21E vs. 327bps FY18) under MFRS 9 adoption.

FY19-21E EPS Raised by 9-16%; Maintain BUY, PT Raised to RM18.40

We raise our FY19-21E EPS forecasts by +10/+15.9/+9% due to lower operating expenses, lower funding cost, firmer receivables yield (driving topline growth) and slightly higher credit recoveries. As such, we revise our Price Target to RM18.40 based on an unchanged 13x P/E on CY19E EPS of 141.5 sen (rolled over from CY18). We maintain our BUY rating on AC given an attractive upside potential of 25%. Downside risks: Increase in loan defaults; lower-than-expected receivables growth.

Source: Affin Hwang Research -  6 Jun 2018