INVESTMENT HIGHLIGHTS

• Earnings of RM179.9m above expectations

• Attributed to higher sales, fee and other operating income

• Expansion into M40 segment boosted receivables

• Maintain FY19 earnings estimates due to taking account of seasonality factor of tax holiday

• Revert to NEUTRAL with unchanged TP of RM15.40 as we believe, pursuant to recent run-up, the current share price reflects its fundamental value

Slightly above expectations. Aeon Credit recorded 1HFY19 net profit which was +22.2%yoy higher to RM179.9m. Accordingly, this translated to 57.8% and 55.6% of ours and consensus estimates.

Strong sales in 2QFY19 revenue, translated to +13.0%yoy higher income… The increase in 2QFY19’s net profit was mainly attributable to growth in (1) interest income of RM289.8 (+5.1%yoy), (2) fee income of RM42.3m (+18.6%yoy), and (3) other operating income of RM48.3m (+79.7%yoy). Notably, the other operating income primarily comprised of bad debts recovered and commission income from sale of insurance related products and loyalty programme processing fees.

…with key segments firming up its contribution. The overall stronger revenue in 2QFY19, which grew by +6.7%yoy was led by the stronger sales in key segments namely Personal Financing, Credit Card Financing and Motor Financing, growing by +41.7%yoy, +27.6%yoy and +34.5%yoy respectively. We had expected the strong sales given the tax holiday period whereby the GST was zero-rated in the quarter.

Attractive product launches targeted at middle income customer segment (M40) paid off. The M40 segment now accounts for 30% of the business since it started focusing on this segment two years ago. Recall that growth was mainly accelerated by the introduction of AEON Platinum Credit Card and Personal Financing Scheme with risk-based pricing. Notably, this was evident in the increase of 2QFY19 financing receivables of Credit Card (+11.2%yoy) and Personal Financing (+14.7%yoy) while the total financing receivables grew +11.5%yoy. It is also worth noting that the M40 segment growth coincided with increased quality of receivables with Net Credit Cost of 2.2%, which was way below its historical average of 3.23% and record low of Non-performing loan of 2.07% since 1Q17, as well as improved new sales collection.

Proposed Interim Dividend. The company has declared an interim dividend of 22.25sen which represents a payout ratio of 32.0% of 1HFY19 net income.

Earnings estimates. While the results came in slightly above expectations, we are maintaining our estimates for FY19 and FY20 respectively. This is taking into account our assumption of the bump up in sales in 2QFY19, as customers made early purchases to take advantage of the zero-rated GST tax holiday, coupled with festive season in the second quarter. We believe that this should normalise in 2HFY19.

Valuation. Our outlook on the group’s business remains positive, with continuous sales growth in 1HFY19 and strategic product offerings to continually expand the M40 market segment. Accordingly, this will bode well for the company in terms of capturing market share and strengthening its asset quality in the long run. However, while we remain optimistic on the prospect of AEON Credit, we believe that the run-up in share price recently indicated that the positives have already been priced in. Therefore, we are prompted to revert our call to NEUTRAL with an unchanged TP of RM15.40, pegging the group’s FY20 BVPS of 7.0 to PBV of 2.2x.

Source: MIDF Research - 5 Oct 2018