A Relief Recovery in Qoq

AEON Credit (AC) reported a 70.8% qoq recovery in 3QFY20 PAT (to ordinary shareholders) as its net credit cost normalized from 118bps (2QFY20) to 90bps (3QFY20). Overall 9MFY20 results (accounting for 65% of our and consensus estimates) were within expectations. We are expecting a stronger 4QFY20 on the back of normalization in its net credit cost, in addition to the interest income contribution from the robust receivables growth in 3QFY20. As at 3QFY20, AC saw its overall receivables growing at 4.6% qoq and 20.7% yoy. We reaffirm our BUY rating and PT of RM17.20 (at a 13x P/E target on CY20E EPS). Despite market competition and a cautious outlook in 2020, we believe that AC will continue to manage its balance sheet growth based on prudent credit-risk assessment.

3QFY20 Results +70.8% Qoq; 9MFY20 In-line With Expectations

AC’s 9MFY20 PAT (to ordinary shareholders) declined by 24.3% yoy to RM194.4m, as weaker results in 2QFY20 dragged down year-to-date earnings. Nonetheless, we saw a more positive result in 3QFY20, as PAT rose +70.8% qoq on the back of lower impairment provisions. To recap, the 9MFY20 provisions (391bps in 9MFY20 vs. 208bps in 9MFY19) also include provisions set aside for performing accounts.

How AEON Credit Fared in 3QFY20?

Receivables growth has been at a robust 20.7% yoy, while year-to-date at 15.4% (on track to meet our FY20 growth target of 20% yoy). The key drivers were from motorcycle, auto and personal financing loans. 9MFY20’s average receivables yield held up steadily at 14.8% vis-à-vis the 15.1% in 9MFY19 as AC focuses on growing the high-return personal financing, motorcycle, credit card and auto-financing portfolios. Meanwhile, the non-performing loan (NPL) ratio saw a 0.12ppt improvement to 1.93% as at 3QFY20. On the other hand, AC’s 9MFY20 cost-to-income ratio surged to 65.8% vs. 56.7% in 9MFY19 due to higher impairments.

Reaffirm BUY Call; Price Target Unchanged at RM17.20

We Reaffirm Our BUY Rating on AC, With Our TP Unchanged at RM17.20 (based on a P/E target of 13x on CY20E EPS of 132.6 sen). We remain upbeat on AC driven by its value-chain transformation project and expansion into the higher-income M40 market and an improved B2C2B model. Downside risks: weaker credit quality

Source: Affin Hwang Research - 20 Dec 2019