INVESTMENT HIGHLIGHTS

• Visited to AEON Credit Service for latest update

• Complete Bonus shares and Rights ICULS issuance

• Stay focus to grow market share in major segments

• No change in earnings estimates

• Maintain BUY with TP RM14.27 Visit to AEON Credit Service. We met with Mr. Lee, CFO last week for an update on any new developments. This includes recent changes in the industry and its strategy moving forward.

Completion of Bonus shares and Rights ICULS issuance. We note that both corporate exercises have been completed, with the listing of Rights ICULS, with 3-year minimum 3.5% coupon rate on 21st September 2017. It was issued on the basis of 2 ICULS for every 1 existing ACSM share. Earlier before, the group has issued Bonus shares on the basis of 1 Bonus Share for every 2 existing ACSM shares. On the Rights ICULS, the group managed to meet its target of raising RM432m in cash. The proceeds will be used to repay long-term bank borrowings, in a move to enhance its CAR ratio that currently stands at 20% (vs. BNM’s requirement of 16%). The remaining portion of the proceeds will be largely utilized for working capital, which primarily consists of provision to its customers. Note that the subscription of ICULS was applied in excess by 3.31%, as announced on 12th September 2017. We view that this situation reflects positively on shareholders’ confidence in the company’s prospect moving forward.

Conversion of ICULS into ordinary shares. The conversion price has been fixed at RM10.99, which translates to a total conversion of 39.3m shares. Assuming full conversion, potential dilution of -14.8% is expected on our FY19 BVPS. However, at this juncture, we have not yet imputed it to our estimates given the uncertainty of conversion.

Not much change in business operation. While we took comfort on the successful completion of the fundraising exercise, we gather that not much change has been made since last quarter. Management remains focus on its transformation program initiatives, expecting significant improvement in its operating expenses.

NIM is expected to stay around the current level. Note that NIM ratio has been in a downward trend, with the latest rate recorded at 11.7%, -50bps yoy. The slight decline in NIM was due to the inclusion of used car financing to the company’s loan portfolio which has lower yield. However, management highlighted that NIM will not experience any significant compression in FY18 and FY19 despite the decline. This is primarily driven by the company’s strategic loans portfolio rebalancing, ensuring NIM remains at a healthy level. As such, we assume that any movement in NIM ratio will be in a range of +/- 50bps for FY18 and FY19 respectively.

Maintain forecast. At this juncture, we maintain our estimates on FY18 and FY19 pending the 2QFY18 results announcement on 5th October 2017.

Valuation. With no changes to our estimates, we maintaining our TP at RM14.27 based on pegging its FY18 BVPS to 3-year historical average PB of 2.6x. We are also maintaining our BUY call for now despite the total returns is below our 15% threshold, as we awaits the pending 2QFY18 results announcement this week. We do not discount the possibility of a downgrade should there be no further see any short term catalysts or any possible variations in 2QFY18 earnings. As for now, we continue to like AEON Credit due to its healthy financial standing and robust earnings prospect, coupled with superior NIM in comparison to other banking stocks.

Source: MIDF Research - 2 Oct 2017