AEON Credit (ACSM)’s FY13 earnings were within consensus and our full-year forecasts, at 105.4% and 107.2% of both numbers respectively. Revenue and core net profit surged 35.7% and 41.1% y-o-y. The company recommended a 19.5 sen single tier final dividend, bringing its FY13 dividends to 35.5 sen. We lift our FV to MYR15.80, pegged to 14.0x FY14 EPS vs 12.3x previously, implying a 0.7x PEG given ACSM’s consistent earnings growth. However, the stock has run ahead of its valuation and now offers very little upside. Maintain NEUTRAL.

-  Another great showing. ACSM’s FY13 core net profit surged 41.1% yo-y and 4.1% q-o-q respectively, largely due to: i) a stronger revenue growth of 35.7% (vs 27.7% in FY12), ii) higher EBIT margins of 52% (vs 49% in FY12), and iii) a significant 38.9% (vs 28.5% in FY12) growth in interest income. Financing receivables also grew at a strong 58% y-o-y to MYR2.36bn vs MYR1.52bn in the preceding year.

-  Sustainability of loans growth. ACSM’s capital adequacy ratio (CAR) has dropped to below 18% based on our estimates, and is dangerously close to the 16% minimum required by Bank Negara. As such, a planned capital raising exercise - likely to involve a rights issue and debt raising -are on the cards. We believe that ACSM aims to boost its CAR to 25%-26%, in keeping with our assumption of future receivables growth of >20%.

-  Limited upside. We upgrade our FV to MYR15.80, pegged to a 14.0x forward FY14 EPS (previously 12.3x). Our assumptions for the stock’s forward P/E is based on the mother share's 2-year P/E of 21.6x, and applying a discount on loss of control (DLOC) vs the previous FV, which was pegged at 17.6x. Although our FV translates into an implied 0.7x price-to-earnings growth (PEG) given our belief that ACSM will continue to chalk up strong earnings growth and high ROEs, we see a very small upside at this juncture, as the stock price has run ahead of its valuations. At the current price, ACSM’s dividend yield of <3% makes the stock less appealing. All said, anticipation of margin compression may take the shine off this stock despite the prospects of increasing business volume.

Source: Kenanga