Aeon Credit’s long-awaited capital-raising has finally materialized in the form of an issuance of unrated perpetual notes  in tranches up to  a sum of  MYR400m.  We  are  optimistic  that  this  will  remove  the  hurdles  to growth of ACSM’s financing business. We upgrade our call to BUY,  but tweak  our  FV  to  MYR18.10  as  we  assume  some  dilution  based  on  an annual distribution of 7% to perpetual bondholders.

• Addressing CAR concerns. As the perpetual notes will be classified as equity,  they  will  directly  address  the  company’s  current  15.5%  capital adequacy  level  (CAR),  which  is  below  the  minimum  regulatory requirement of 16.0%. Recall that the above-industry growth  chalked up by its core retail financing segment has resulted in a drastic drop in Aeon Credit’s CAR. Based on our estimates, the company could boost its CAR to  28.8%  if  it  issues  all  MYR400m  worth  of  perpetual  notes  and recognizes them as equity. This will also halve its net gearing to 2.7x.
• Notes to be issued in tranches.  The  company has proposed to issue the  perpetual notes in tranches,  which will give it flexibility in  managing its borrowing  cost  while its financing business  continues to pick up pace While  a  dilution  in its  earnings  is to be expected,  this effect is still  less pronounced on the ROE front compared with a pure rights issue.
• Positive  move,  as  we  deem  it  a  necessary  step  in  order  to  avoid hiccups  in  the  company’s  business  growth.  However,  we  make  no changes to our forecasts due to uncertainties over: i) the timeline and the size of the tranches, ii) the financing rate (which  we estimate at  6-8%), and iii) whether all the proceeds will channel to the financing business.
• Upgrade to BUY.  Given the lack of  details at this juncture, we assume the  distribution  of  the  MYR400m  perpetual  notes  at  7%.  This  will  give rise  to  a  10.2%  dilution  in  earnings  attributable  to  shareholders  and 3.5ppts  dilution  in  ROE.  Accordingly,  we  adjust  our  FV  to  MYR18.10 (from  MYR20.20).  Nevertheless,  we  upgrade  our  call  to  BUY  as  the proposal  removes  the  uncertainties  over  Aeon  Credit’s  future  growth. Our  FV  is  pegged  to  a  13.3x  FY15F  P/E  (from  14.9x)  to  reflect  the dilution arising from the perpetual notes. This translates  into a 0.7x PEG on a 3-year forward earnings CAGR.

Risks.  Management’s key concern is  whether Bank Negara will  extend the  current tightening  measures on household lending to the  motor financing  segment, as motor and car lending in combination make up 44.3% of the company’s receivables.

Scenario analysis.  In view of the lacking of firm details, we  drew up three scenarios on an  assumption of the  full issuance of  the  MYR400m perpetual notes at financing rates  of  6-8%.  The  possible  dilution  to  the  company’s  FY15F  earnings  may  range 
from  8.2-12.4%  as  we  deduct  the  amount  of  distribution  attributable  to  perpetual bondholders  from  its  core  earnings.  Correspondingly,  its  ROE  could  be  diluted  by 2.8-4.0ppts.  Note  that  the  potential  dilution  in  shareholders’  equity  will  be  less apparent  than if  the company opted  for a  pure rights  exercise. Our FV of MYR18.10 is premised on a financing rate of 7.0%.

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Source: RHB