KEY INVESTMENT HIGHLIGHTS

• Earnings below expectations

• Higher operating expenses due to higher provisions from strong growth in financing receivables

• Revenue continued to be strong

• Asset quality solid

• FY20 and FY21 earnings forecast revised downwards by - 9.6% and -8.9% respectively

• Maintain NEUTRAL with revised TP of RM15.50 (from RM15.60) due earnings revision

Below expectations. Aeon Credit Service (M) Bhd (ACSM) recorded a 9MFY20 net profit decline of -22.8%yoy, below expectations. The net profit was at 67.4% and 66.8% of our and consensus' full year estimates respectively. The variance was due to our underestimation of the rise in operating expenses.

Higher provisions from higher financing receivables. Operating expenses for 9MFY20 grew +36.6%yoy due to higher impairment loss. This was the result of early recognition of impaired receivables as required under MFRS 9. Provisions came in +69.6%yoy higher to RM362.5m. However, the higher provisions were due to the strong expansion in financing receivables.

Continued strong revenue. The higher financing receivables also resulted in strong growth in revenue. It grew +17.8%yoy to RM1.19b and was led by credit cards, motorcycle, auto and personal financing segments.

Strong growth in gross financing receivables. Gross financing receivables expanded +4.5%qoq and +20.7%yoy to RM10.0b as at end 3QFY20. The main drivers were the strong growth in credit cards, motorcycle, car and personal financing. These grew +25.9%yoy to RM0.88b, +27.4%yoy to RM3.08b, +17.0%yoy to RM2.85b and +20.8%yoy to RM2.81b respectively.

Asset quality improved and better collection as well. Nonperforming loans ratio improved by -7bp qoq and -14bp yoy to 1.93%. We noted that asset quality have been very healthy for the past couple of years. Meanwhile, current collection ratio remains high at 98.0%.

Earnings forecast revised downwards. We are revising our FY20 and FY21 forecast downwards by -9.6% and -8.9% to account for the higher operating expenses.

Valuation and recommendation. While we noted that ACSM managed to maintain its strong revenue growth momentum, its high operating expenses continue weigh to its earnings. The strong growth in financing receivables suggests that there is still demand for its financial products with strong asset quality. However, there will be should there be a slowdown in economic growth. Hence, we maintain our NEUTRAL call. We revised our TP to RM15.50 (from RM15.60) 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 - 20 Dec 2019