AEON  Credit  (ACSM)’s  1QFY14  earnings  were  within  consensus  and our  full-year  forecasts  at  24.7%  and  25.2%  respectively,  boosted  by aggressive  growth  in  vehicle  and  personal  financing  receivables.  The company’s asset quality remained intact. However, we see greater risks at this juncture,  as  the  higher  leverage  ratios and  increasing  pressure to address its low capital adequacy ratio warrant the need for an equityraising exercise.  Maintain NEUTRAL,  with our FV pegged to 14x FY14F EPS, at a discount to the 2-year P/E band of its parent. 

- Boosted  by  vehicle  and  personal  financing.  ACSM’s  1QFY14  core net  profit  soared  47.2%  y-o-y  and  14.5%  q-o-q,  largely  due  to:  i) aggressive  growth  in  receivables  (61.8%  y-o-y,  13.5%  q-o-q),  and  ii) higher  EBIT  margins  at  52.6%  (vs.  50.1%  in  1QFY13).  Segment-wise, personal  financing,  which  offers  attractive  rates  at  0.7%  per  month, chalked up the highest growth at 84.3% y-o-y (15.2% q-o-q), albeit this is lower than the  >100%  recorded in FY13. The vehicle financing business gained  traction, with  the  motorcycle  easy  payment  (MEP)  segment growing  35%  y-o-y,  while  its  relatively  new  used  car  easy  payment (CEP) – based on the Bai Bitamin Ajil principles – jumped 380% y-o-y. 

- Asset  quality  still  intact.  Despite  the  strong  growth  in  receivables, ACSM’s capital adequacy ratio (CAR)  narrowed to 17.4%  from 17.6% in FY13.  It  managed  to  reduce  its  non-performing  loans  (NPL)  ratio  to 1.56%. We are keeping a close  tab on its NPL line  as we think its newer used car financing and SME equipment portfolios have yet to take off.

- Greater  risks.  The  company’s  1QFY14  results  showed  an  enhanced cost efficiency of 54% (vs.  58.5% in 1QFY13), better profit margins  on lower impairment loss ratio, as well as  a commendable high annualized ROE  of  36.8%.  However,  we  remain  wary  of  the  company’s  leverage risks. We  note  that the debt-to-equity (D/E) ratio is now at  a record high of 4.6x, near the top end of its target D/E ratio  of 3x-5x, due to additional term  loans  of  MYR354m.  This  could   potentially  give  rise  to  a  capitalraising  exercise  in  2H2013,  as  the  CAR  is  approaching  the  regulatory requirement of a minimum 16%.

Source: RHB