ACSM’s 9M14  net  profit  of  MYR127m  is  in  line,  at  79%  of  our  and consensus  forecast.  Topline  growth  remained  strong  due  to  the  motor and car easy payment segments, but profit growth – up a milder 34% y-o-y  -  was  offset  by  a  rise  in  provisions  and  NPLs.  Capitalisation  plans are in place but we remain concerned over asset quality, which may de-rate the stock. Maintain BUY and MYR18.10 FV for now.

Marching forward. The group’s 9M14 core profit jumped 34% y-o-y (flat q-o-q)  while  interest  income  surged  51.5%  y-o-y  owing  to  growth  in receivables to 62.1% y-o-y. The new used car and motor easy payment segments  again  chalked  up  the  biggest  segmental  growth.  Earnings grew slower than the topline due to: i) higher loan loss provision, and ii) surging finance costs in line with the 70% increase in its borrowings.    

Capital  management  in  place.  As  at  end-Nov,  ACSM  had  issued MYR100m  unrated  perpetual  notes  at  a  distribution  rate  of  6.5%  p.a., payable semi-annually. There is a rate reset by way of 1% increase p.a. (up to 20%) if the company does not redeem the perpetual notes at the end of the fifth year. We estimate that this boosted the company’s capital adequacy  ratio  (CAR)  to  18%  from  a  low  of  15.5%  in  2Q14  (thereby fulfilling the minimum 16% regulatory CAR requirement). We estimate its debt-to-equity (D/E) ratio improved to 4.4x from 5.67x in 2Q14.  

Signs  of  deteriorating asset  quality.  A key highlight in ACSM’s asset quality  is  a  surge  in  non-performing  loan  (NPL)  ratio  to  2.02%,  from 1.63%  in  2Q14  and  1.56%  in  1Q14.  We  suspect  signs  of  portfolio seasoning, especially in its financing business towards the lower-income customer segment. The company’s loan loss provision climbed 70% to a total  of  MYR106m  YTD,  resulting  in  its  loan  loss  coverage  remaining fairly stable at 121% (vs 121% in 9M13). Credit costs surged to 466bps (1H14: 420bps), the highest levels since 1Q12.  

Keeping close eye on NPL ratios. As earnings are within estimates, we maintain  our  forecast  and  BUY.  Our  MYR18.10  FV  is  pegged  to  an unchanged  13x  FY15F  P/E  (0.7x  3-year  forward  PEG),  and  had  pre-emptively  assumed  the  dilutive  effect  from  the  perpetual  notes.    NPLs, which  remain  a  concern,  have  been  creeping  up  since  1Q14.  We  may risk downgrading our forecasts should NPLs deteriorate further.

Dilutive  effects  of  perpetual  notes.  Recall  that  our  FV  of  MYR18.10  had  already pre-emptively  reflected  the  dilutive  effects  from  the  perpetual  notes.  In  our  31  Oct report, “Addressing Capital Concerns”, we had assumed a 7% distribution rate and a maximum issuance  of  MYR400m perpetual  notes,  which  lowered  our  FV  by  10%  to MYR18.10.  While  the  announced  distribution  rate  of  6.5%  is  in  line  with  our assumptions,  the  company  may  not  issue  all  MYR400m  perpetual  notes  as  YTD  it had only issued MYR100m of the notes. 

Financial Exhibits

We pegged the revenue/ net profit growth at 23.0-24.0%. Average yields for the loan portfolio are assumed to be close to 20%, save for motor vehicles at ~13-14%.

Receivables growth tends to be compensated by funding with debt and raising capital due to the company’s lack of ability to tap into deposit-taking

SWOT Analysis

Company Profile

AEON  Credit  operates  a  micro-financing  business  in  Malaysia  which  provides  easy  payment  schemes,  personal  financing  and  credit card facilities.

Recommendation Chart

Source: RHB