There is no change in our view that FY21 will remain a lacklustre year, while we expect to see an earnings recovery in FY22 on the back of a rebound in receivables growth and lower net credit cost. We have adjusted our FY21 and FY22 earnings forecasts by -14% and +6.3% in this report, post the 1QFY21 results and after a discussion with management. On a more positive note, Aeon Credit has stepped up collection initiatives from delinquent borrowers, after the moratorium period (Apr-May 20) came to an end. We believe that Aeon Credit fits into a longer-term investment horizon, while in the near term it could be a beta stock due to the sharp correction in share price ytd. Maintain BUY, with a higher Price Target of RM12.70 (based on a 13x P/E target on CY21E EPS).

Anticipating a Better 2QFY21 With Lower Net Credit Cost

To recap, Aeon Credit recently reported a poor 1QFY21, with net profit declining by 68.5% yoy and 67.2% qoq, largely due to a higher impairment loss on receivables. In our recent discussion with management on the outlook for 2QFY21, we learned that credit collection initiatives post the moratorium period in April-May 2020 have yielded better results. Nonetheless, the net credit cost in FY21 is expected to remain elevated as we expect a potential rise in Aeon Credit’s gross NPL level.

Key Drivers for a Recovery Year in FY22

To recap, Aeon Credit has invested in various digital transformation initiatives such as an e-wallet, Aeon PLUS card and digitizing its operations and approval processes, which have enhanced its overall turnaround time. Its focus to expand receivables growth in the M40 segment would also help lower its overall portfolio risk and capture stronger receivables growth when the economy recovers.

Maintain BUY, PT Revised to RM12.70 (based on 13x P/E Target)

Reaffirm BUY, with a higher PT of RM12.70 (from RM12.30), based on an unchanged P/E target of 13x on the CY21E EPS of 97.9 sen. Aeon Credit could be a beta play due to the sharp correction in its share price ytd. We remain upbeat on Aeon Credit given its value-chain transformation initiatives, new products and market diversification through its B2C2B model, which are game changers in this digital age in reaching out to more customers. Downside risks: rising unemployment rate; increased defaults.

Source: Affin Hwang Research - 7 Jul 2020