Overall, FY20 results were below our expectations by 7.9% (variance in higher funding cost), though within street estimates. Meanwhile, for FY21E, we expect net earnings to decline by 24.2% yoy due to higher provisions (353bps in net credit cost) and a 4% yoy decline in outstanding receivables. Recently, the company had offered a 1- month deferment period in April 20 for objective, personal, motorcycle and auto financing customers (who are not >90 days overdue) in order to ease cashflows burdens. Maintain SELL with a PT at RM6.30.

FY20 Results Came in Below Affin’s Expectations

Aeon Credit (AC)’s FY20 PAT (to ordinary shareholders) declined by 19.5% yoy to RM274.4m, subsequent to higher operating expenses (in particular higher receivables impairment in 2QFY20) while overall funding cost also jumped (+30% yoy) as receivables grew by 19.6% yoy. FY20 EBIT margin declined yoy from 53% to 44.8% (due to higher opex). For FY20, AC saw a 46% yoy increase in provisions (credit cost 341bps in FY20 vs. 216bps in FY19), due to seasonal factors (during the Raya Festival), write-offs and for new receivables accounts secured. In 4QFY20, PAT (ordinary shareholders) rose +14.5% qoq as receivables provisions were lower while the 4QFY20 operating profit improved (+11.8% yoy; +17% qoq), in-line with receivables growth (+3.6% qoq).

How Aeon Credit Fared in 4QFY20 and FY20?

AC’s key receivables growth drivers were from motorcycle-financing (+40% yoy), auto-financing (+18.7% yoy) and personal financing (+17% yoy). FY20’s average receivables yield declined marginally from 15% in FY19 to 14.7% in FY20 as AC focuses on expansion towards the M40 group (charged slightly lower interest rates vs. the B40 group). The NPL ratio saw an improvement to 1.92% (4QFY20) from 2.04% in 4QFY19.

Reiterate SELL, Price Target at RM6.30

Reiterate SELL on AC, with our PT unchanged at RM6.30 (based on a P/E target of 6.8x on CY20E EPS of 92.5 sen). We anticipate a recessionary year in 2021E (Affin’s GDP forecast at -3.5% for 2020), arising from the negative impact on business activities, following expectation of a prolonged COVID-19 outbreak. We foresee AC’s receivables to decline by 4% yoy and a higher net credit cost at 353bps Upside risks: improvement in credit quality, stronger receivables growth.

Source: Affin Hwang Research - 10 Apr 2020