INVESTMENT HIGHLIGHTS

• FY18 earnings came in above estimates

• Attributable to better operating income in major segments

• Earnings estimates for FY19 are revised slightly higher, while introducing our FY20 forecasts

• We maintain our BUY recommendation with adjusted TP of RM14.30 (from RM14.75) as we ascribed a lower PBV

Broadly in-line. Aeon Credit’s FY18 earnings climbed +13.0%yoy higher to RM300.1m. The group’s cumulative earnings accounted for 106.9% and 119.4% of ours and consensus’ expectations respectively, supported by steady progression in interest income of +13.6%. Notably, its biggest segments namely Automobile Financing, Personal Financing and Motorcycle Easy Payment grew at an average of +15.0%yoy. On quarterly basis, the group’s 3QFY18 net profit grew by +2.8%yoy.

Key segments steered earnings higher. Personal financing which accounted for approximately 24% of operating income, recorded a strong growth of +23.2%yoy. Meanwhile, both Automobile Financing’s and Motorcycle Easy Payment’s operating income displayed the same trend, climbing higher by +13.5%yoy and +9.6%yoy respectively. We believe this healthy improvement stemmed from higher consumer spending during the quarter due to seasonality factors. Overall, the income from the group’s core business grew mostly in tandem with our assumption of +14.2% in FY18. In FY19, we are ascribing high singledigit growth assumption to its net interest income. We believe this achievable considering the group’s consistent performance of expanding its core income over the years.

Growth in opex should be slower in the long run. Earnings in FY18 were moderated by higher overall opex which increased +9.7%yoy. This was primarily driven by higher funding cost, due to increase in borrowings of +2.7% in parallel with the growth of receivables. Despite the higher opex, we took comfort to see its ratio against revenue still trended down, although slightly by -0.3ppts yoy. Moving forward, we believe the group will continue to strive for a leaner opex management, coming from its value chain transformation. Key to achieving this will be improvement of its branch operation costs, which have been displayed by the significant reduction in overtime (-18.4%yoy) and money collection expenses (-91.1%yoy).

Final Dividend of RM0.20. This added to a total dividend of RM0.41, which constitutes about 95.3% of our forecast. Accordingly, total dividend paid out was 34.0% of the group’s earnings.

Revising our estimates slightly upwards. Given that the results were above our expectations, we are revising our estimates for FY19. This is taking into account our assumption of +8.4%yoy on the growth of operating income, lifting its net profit by +1.0%yoy from our previous estimate.

Valuation. We maintain our BUY recommendation on Aeon Credit with an adjusted TP of RM14.30 (from RM14.75), pegging the group’s FY19 BVPS of 6.5 to PBV of 2.2x. We are ascribing a lower multiple to reflect the potential dilution from ICULS conversion which could potentially put continuous downward pressure to the share price. However, we continue to be optimistic on the outlook of the group’s business based on its value chain transformation journey. In addition, we are positive on the group’s initiatives to improve customer experience via the introduction of e-wallet and e-money cards, in which we opine, will improve the customers’ brand loyalty with Aeon Credit. Potential re-rating for the group’s earnings would be 1) the outcome of upcoming proceedings between IRB and Aeon Credit, and 2) lower than expected future earnings (FY20 onwards).

Source: MIDF Research - 30 Apr 2018