AEON Credit’s  1QFY15  earnings  of MYR56m were within expectations. Vehicle  financing  is  still  the  top  performing  financing  segment,  with notable  improvements  in  non-interest  income  avenues.  The  company faces  lower asset quality  and  net interest margin compression  due to its product mix.  Maintain  BUY  and  a  MYR18.70 FV (12x FY16F P/E)  as we believe the downside risk is capped vs high ROE.

• In line.  Aeon  Credit  Service (Aeon  Credit)’s  1QFY15  core profit  (+18% q-o-q, +36% y-o-y growth) was  within expectations.  Despite the number being as high as 29% of our full-year forecast (and 26% of consensus estimates),  we  note  there  was  a  distribution  of  MYR2.7m  to  perpetual holders – paid on 27 May with respect to perpetual notes issued at par of MYR85m – that was not accounted for in its results.
• Positives.  Interest  income  surged  along  with  44%  receivables  growth, defying  the  slowdown  in  industry  household  debt.  Vehicle  financing, which  combines  the  motor,  used  car  and  new  car  (a  new  business segment for the company)  segments,  was the  top performer  with  108% y-o-y  growth  in  receivables  (13%  q-o-q).  Credit  costs  moderated  to 389bps,  based  on  our  estimates  (vs  <400bps  in  FY14).  Q-o-q  fee income  ratio  increased  to  16%  from  15%,  on  par  with  its  strategies  to boost  fee  income  avenues,  thanks  to  customer  loyalty  programme processing fees. Its capital adequacy ratio, at ~19%,  is also above the minimum 16% requirement due to MYR143m perpetual notes.
• Negatives.  Net  interest  margins  (NIM)  continued  to  be  compressed  at 15.6%  vs  16.7%  a  year  ago,  due  to  a  higher  proportion  of  vehicle financing  in  its  revenue  mix  and  a  higher  cost  of  funds.    Asset quality deteriorated further as  its  non-performing loan (NPL) ratio reached a 5-year high of 2.18% from 1.56% in 1QFY14. While no further details were given, we gather that collection  ratios for some segments within  vehicle easy  payment  dropped,  due  to  its  exposure  to  low-income  customers. This is in line with recent industry data of rising NPL in vehicle financing. The  company  is  enhancing  its  credit  scoring  system  and  tightening approval criteria, depending on economic conditions.
• Maintain BUY  and  MYR18.70 FV  (12x FY16F P/E, implying a  0.8x 3-year  forward  PEG).  We  make  no  changes  to  our  forecasts,  which  are more conservative than consensus estimates, and  believe that there is limited downside risk based on last price (relative to high ROE of 30%). 

Source: RHB