AEON Credit (AC) reported a weaker 2QFY19 profit-after-tax (PAT) of RM77.5m (-19% qoq), primarily due to higher provisions (which is seasonal). However, 1HFY19 PAT to shareholders was up 23.3% yoy, and the results were within Affin and consensus estimates. We remain positive on AC’s outlook in 2HFY19, with our FY19E receivables growth forecast of 13.4% yoy given further expansion into the M40 target market. The gross NPL ratio improved on a qoq basis to 2.07% vs. 2.26% in 1QFY19 and 2.48% in 2QFY18. Reaffirm BUY call and TP of RM18.40 (at 13x P/E target on CY19E EPS). A country top pick.

1HFY19 Results Within Expectations, PAT Up 23% Yoy

AC saw 1HFY19 PAT (ordinary shareholders) up 23.3% yoy to RM173.1m, as interest income expand at a rate of +6.4% yoy while fee income grew by a more robust +13.6% yoy. Overall, 1HFY19 net provisions (i.e. including credit recoveries) continued to decline by 32% yoy and was reflected in an improved net credit cost of 269bps against 339bps in 1HFY18. This was despite the company seeing a 85.7% qoq rise in net provisions in 2QFY19 (net credit cost up +50bps to 220bps), of which had affected 2QFY19 PAT (-19% qoq). Gross receivables growth was at 11.5% yoy and 4.6% qoq, underpinned mainly by the personal financing (+14.7% yoy), motor-financing (+12.5% yoy) and autofinancing (+12.2% yoy) segments, which collectively account for 85.7% of outstanding receivables (Aug18). AC has started tapping more on the M40 (middle 40% household income category of between RM3,860-8,319) while keeping to stringent credit approvals and control practices.

Management Defends Stance on Additional Tax Bill of RM96.8m

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 a Notice of Motion fo the Court of Appeal (with hearing date fixed on 28 Nov 2018) to challenge the High Court’s decision on 5 Mar18.

Reaffirm BUY Call; TP Unchanged at RM18.40

We reaffirm our BUY call and 12-month target price 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, weaker credit quality.

Source: Affin Hwang Research - 5 Oct 2018