AEON Credit’s (AC) 1QFY19 profit-after-tax (PAT) of RM95.6m (+32.4% yoy; +20.9% qoq) outperformed Affin’s and consensus estimates for FY19E largely due to sharply lower receivables provisioning. Net receivables grew 3.8% yoy, while yields continued to stay firm at circa 18%. Despite the adoption of MFRS 9 in FY19, gross NPL ratio had improved to 2.26% vs. 2.33% in 4QFY18. The Day-1 impact (MFRS 9) on AC’s balance sheet adjustment was RM344.5m and there was no detrimental impact to its capital. Maintain BUY. Price Target unchanged at RM18.40, pending more guidance from management.

1QFY19 Results Above Expectations, PAT Up 32.4% Yoy, 21% Qoq

AC saw a 32.4% yoy growth in 1QFY19 PAT (ordinary shareholders) of RM95.6m, as interest income continued to expand at a rate of +7.6% yoy while fee income grew by +8.6% yoy. Sharply lower receivables provisioning also drove 1QFY19 earnings higher, as credit cost is estimated to have declined to 154bps from 333.6bps in 1QFY18, under the adoption of MFRS 9. Overall operating expenses was down 6.4% yoy and 11% qoq, while on a CIR basis, it has dipped to 50.6% vs. 58.2% in 1Q18. Though net receivables growth was at a mediocre 3.8% yoy, we believe that AC will turn more aggressive down the road as focus will be on targeting the higher income market to grow its credit card, personal financing and car-financing packages.

Management Defends Stance on Additional Tax Bill

Despite AC previously 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. AC had filed an appeal fo the Court of Appeal (with hearing expected in 2022-2023) to challenge the High Court’s decision on 5 Mar18.

Maintain BUY; Price Target Unchanged at RM18.40

Maintain BUY with an unchanged Price Target of RM18.40 (based on a P/E target of 13x on CY19E EPS). AC is on track to deliver a solid performance over FY19-21E, arising from positive outcomes of its value-chain transformation project, realizing higher receivables returns and benefitting from the 2% income tax reduction for the lower income group. Downside risks: deterioration in consumer sentiment, decline in credit quality (resulting in higher NPLs).

Source: Affin Hwang Research - 29 Jun 2018