INVESTMENT HIGHLIGHTS

• Earnings within expectations

• Income growth remains solid on continued momentum of gross financing receivables growth

• Dragged by higher impairment losses, marketing expenses and funding cost

• Maintain earnings forecast

• Maintain NEUTRAL with revised TP of RM17.30 (from RM16.50) due to rollover of valuation

Within expectations. Aeon Credit Service (M) Bhd (ACSM) recorded a 1QFY20 net profit decline of -14.7%yoy. However, this was within our and consensus' expectations at 22.0% of respective full year estimates. Main contributor for the decline in earnings was the higher expenses and finance cost.

Impacted by MFRS 9 and marketing of new products. Operating expenses rose +34.9%yoy to RM222.1m. Major contributors for this spike was the +63.4%yoy to RM93.3m on impairment loss on receivables and +114.3%yoy growth to RM24.0m in cost associated with advertisement & promotion (A&P). The higher impairment loss was due to early recognition of impaired receivables as required under MFRS 9. However, we noted that this fell -1.3%qoq. Meanwhile, higher A&P expenses were due to the introduction of new products and services.

Funding costs added to the drag. Funding costs during period grew +33.3%yoy to RM297.5m. This was due to higher interest paid for term loans/financing which went up by +20.8%yoy to RM70.2m as current term loans/financing increased to RM713.3m as at 1QFY20 from RM400.0m as at 4QFY19.

Income growth remained solid. Total income expanded +15.6%yoy to RM410.2m as revenue grew +16.2%yoy to RM378.6m. Other income rose +8.0%yoy to RM31.6m. Growth of income was supported by strong growth in financing receivables.

Strong growth in financing receivables. Total financing receivables grew +21.8%yoy to RM9.14b due to increased receivables in credit card, personal financing and motorcycle financing segment. These grew +24.2%yoy to RM789.7m, +30.8%yoy to RM2.59b and +27.8%yoy to RM2.75b respectively. Despite the higher receivables, non-performing loans remains well managed, derived from improved collection of delinquent receivables and new sales. The NPL ratio improved by -12bp qoq to 1.92%.

Source: MIDF Research - 28 Jun 2019