KEY INVESTMENT HIGHLIGHTS

• Earnings was well below expectations

• Revenue growth continue to be strong on robust expansion of gross financing receivables

• MFRS 9 continue to be a negative impact by pulling up operating expenses higher

• Funding cost remained high as well

• FY20 and FY21 earnings forecast revised downwards for - 21.5% and -20.4% respectively

• Maintain NEUTRAL with revised TP of RM15.60 (from RM17.30) due revision of earnings

Below expectations. Aeon Credit Service (M) Bhd (ACSM) recorded a 1HFY20 net profit decline of -25.7%yoy as 2QFY20 earnings fell at faster pace of -39.1%yoy. This was well below our and consensus' expectations at 34.7% and 36.8% of respective full year estimates. The main drag to earnings was the higher expenses.

Continue to be impacted by MFRS 9. Operating expenses for 1HFY20 expanded +38.4%yoy due to higher impairment loss. This was the result of early recognition of impaired receivables as required under MFRS 9. Provisions came in RM248.0m as compared to RM152.3m recorded in 1HFY19.

Expensive funding costs remained. Financing costs went up by +29.7%yoy. This was attributable to higher interest expense paid for term loans/financing, which increased +19.9%yoy to RM141.6m. Current borrowings as at Aug'19 was RM1.06b as compared to RM400m as at Feb'19.

Solid revenue growth. While operating expenses and funding costs increased, revenue also expanded solidly to moderate the drag to earnings. Revenue grew +19.0%yoy as interest income was +19.0%yoy higher. This was supported by strong growth in financing receivables.

Growth of gross financing receivables continued to be robust. The gross financing receivables as at end 2QFY20 was RM9.6b, an increase of RM1.7b as compared to same period last year. Asset quality also remained manageable as non-performing loans ratio improved -7bp yoy to 2.00% as at end 2QFY20.

Revised earnings forecast downwards. We are revising our FY20 and FY21 forecast downwards by -21.5% and -20.4% respectively to take into account the higher than expected operating expenses.

Valuation and recommendation. While we noted that ACSM managed to maintain its strong revenue growth momentum, its high operating expenses and funding costs continue to be a heavy weigh to its earnings. The strong growth in financing receivables suggests that there is still demand for its financial products. However, we are slightly concerned that the fast growth increases the risk for higher NPLs if there was a slowdown in economic growth. Hence, we maintain our NEUTRAL call. We revised our TP to RM15.60 (from RM17.30) due to our revision in earnings. We peg ACSM's FY21 BVPS of RM7.60 to PBV of 2.1x (one standard deviation below of its 5 year average PB ratio).

Source: MIDF Research - 27 Sept 2019