Banking on New Initiatives and Catalysts

Despite having to bear with inevitably higher net credit cost of circa 3.5%-4.0% (as a result of MFRS 9’s impact), we believe that Aeon Credit’s (AC) outlook remains intact as there are other management initiatives and industry catalysts, which continue to support earnings expansion. Among others, these include a review of its pricing strategy, beefing up fee income, stepping-up collection, product innovation and being vigilant of technological trends would be gamechangers for AC. Maintain BUY, Price Target unchanged at RM17.20 (based on a 13x P/E target on CY20E EPS).

Credit Cost Outlook for FY20-22E May Stay Elevated ~3.5-4.0%

We have better clarity on the company’s net credit cost outlook (post 2QFY20 results) and in our view, the ‘new norm’ would likely be circa 3.5%-4.0% (inline with our current assumptions of 4%). Based on the 1HFY20E results, AC’s net credit cost spiked up 171bps yoy to 394bps due to the overwhelming growth in receivables (+22.2% yoy) while some delayed repayments during the Raya festive period had also necessitated additional provisions to be set aside. Given the 3 additional public holidays in September 2019, AC is also expected to see additional provisions made on higher receivables growth and delayed repayments (in 3QFY20E).

Banking on New Initiatives and Catalysts on the Horizon

To recap, AC has embarked on various transformation and sustainability initiatives since the start of FY18, including digitalizing/innovating its products and operations. At present, we understand that management is looking into reviewing its pricing strategy, expanding fee income generation, improving collection and enhancing user experience. In our view, staying vigilant of technological trends, i.e. digital-banking, proliferation of e-commerce and capturing its growth would be game-changers for AC.

Maintain BUY, PT Unchanged at RM17.20 (based on 13x P/E Target)

Reaffirm BUY at our PT of RM17.20 (based on a P/E target of 13x on CY20E EPS of 132.6 sen). We remain upbeat on AC as its value-chain transformation initiatives, product and market diversification through its B2C2B model are able to mitigate downside risks from a relatively challenging economic outlook. Dividend yields remain decent at 2-3%, with payout ratio being consistent at circa 40%. Downside risks: Increase in defaults and credit cost; lower-than-expected receivables growth.

Source: Affin Hwang Research - 4 Oct 2019