AEON Credit’s (AC) 1HFY20 ordinary shareholders profit-after-tax (PAT) of RM124.4m (-28.1% yoy) accounted for 34.5% of our full-year forecast of RM360.3m (prior to revisions). The lower-than-expected result was primarily due to the impact of adoption of MFRS 9, which has required AC to set aside additional receivables provisions in light of its robust receivables growth (+22.2% yoy; +10.4% ytd). Nonetheless, we view AC’s operations as relatively strong (1HFY20 revenue growth of 19% yoy), on the back of its digital transformation initiatives and shift in business focus, resulting in expansion of its market share. Reaffirm BUY, with a lower PT of RM17.20 (at a 13x P/E target on CY20E EPS) after our net earnings revisions of -17.3%/ -12.1%/ -10.5%. A DPS of 22.25 sen has been proposed.

1HFY20 Results Below Expectations Again; PAT Fell 28% Yoy

AC’s 1HFY20 PAT (to ordinary shareholders) was down 28.1% yoy to RM124.4m, as it saw another weaker quarter in 2QFY20, as PAT was 47% lower yoy. The requirement under MFRS 9 to set aside additional provisions in light of its robust receivables growth (+22.2% yoy) was the key dampener to its 1HFY20 results. In contrast to 1HFY19, the group saw a positive reversal in credit cost due to over-provisions made prior to the MFRS 9 adoption. Meanwhile, the increase in 1HFY20’s other operating expenses such as staff costs (+11% yoy) and advertising & promotion (>100% yoy) were in-line with its business growth. 1HFY20’s average receivables yield is holding up steadily at 15% vis-à-vis the 15.3% in 1HFY19 as AC focuses on growing the high-return personal financing, motorcycle, credit card and auto-financing portfolios.

Earnings Revised Down by 17.3% / 12.1% / 10.5%

Our FY20E/21E/22E EPS have been revised down by 17.3%/ 12.1%/ 10.5% to account for higher provisions, based on a net credit cost assumption of circa 400bps (from 310-360bps).

Reaffirm BUY Call; Price Target Lowered to RM17.20 (from RM19.80)

Reaffirm BUY, but lower our PT to RM17.20 (from RM19.80; methodology unchanged – based on a P/E target of 13x on our revised CY20E EPS of 132.6 sen). We remain upbeat on AC driven by its value-chain transformation project, expansion into the higher-income M40 market and an improved B2C2B model. Downside risks: weaker credit quality.

Source: Affin Hwang Research - 27 Sept 2019