We lower AEON Credit’s TP to MYR18.00 from MYR18.70, which implies an upside of 9%. This is based on a new target  P/E of 10.5x (from 12x) to reflect asset quality risks. We also downgrade our call to NEUTRAL from Buy. Its 2QFY15 results met our and consensus expectations but asset quality deteriorated, with the NPL ratio rising to 2.65% from 2.18% at  end-1QFY15.  While  management  said  the  rise  was  seasonal,  we believe there may be lingering concerns.

Within  expectations.  AEON  Credit  Service’s  (AEON  Credit)  2QFY15 net profit of MYR47m (-16% q-o-q, +10% y-o-y) met expectations, with 1HFY15 net profit of MYR104m (+23% y-o-y) representing 50% of our and  consensus  full-year  PATMI  estimates  respectively.  An  interim dividend of 27.4 sen was declared. 

Results highlights. 2QFY15 net interest income rose 4% q-o-q/31% yo-y to MYR149m on the back of net receivables growth of 7% q-o-q/35% y-o-y.  Vehicle  financing  (comprises  motor  and  car  financing)  led  the growth,  up  49%  y-o-y  and  51%,  annualised,  and  made  up  53%  of receivables (2QFY14: 48%).  Net interest margin (NIM), however, eased by an estimated 40bps q-o-q/100bps y-o-y due to the relatively stronger growth in vehicle financing, where yields are typically lower than the rest of  the  receivable  book,  and  higher  funding  cost  from  new  borrowings during  the  quarter.  Meanwhile,  2Q  overheads  were  under  control  but asset quality saw a slight deterioration with the NPL ratio rising to 2.65% (1QFY15: 2.18%).  Thus, impairment allowances for receivables were up 39%  q-o-q  to  MYR51m  (+69%  y-o-y)  while  impairment allowance/receivables rose to 5.05% (1QFY15: 3.9%; 2QFY14: 4.2%).

Briefing highlights.  Management explained that the rise in NPL came mainly from motor and personal financing, and was seasonal in nature (post festivities). Asset quality has improved post-quarter ended. 

Forecasts.  No change to our FY15F-16F PATMI forecasts but we raiseour FY15F/FY16F reported net profit forecasts by 7%/10% respectively after reclassifying the distribution  on perpetual notes as part of retained earnings  (ie  similar  to  dividends).  Previously,  we  had  included  the distribution as part of the income statement, as a line item below PATMI. 

Investment case.  We have lowered our target FY16 P/E to 10.5x from 12x to  reflect potential concerns regarding AEON Credit’s rising NPLs. Our revised target P/E is in line with the stock’s 5-year average. Overall, we lower  our TP to MYR18.00 from MYR18.70 and downgrade our call to NEUTRAL from Buy.

Source: RHB