We  retain  our  NEUTRAL  call  on  AEON  Credit  with  a  revised  TP  of MYR12.00 from MYR18.00 (13% upside). This is based on a new target P/E  of  7.5x  (from  10.5x)  to  reflect  rising  asset  quality  risks.  While  its 3QFY15 (Feb) results were broadly in line, the NPL ratio rose further to 3.1%  from  2.7%  at  end-2QFY15.  Together  with  a  softer  macro  outlook ahead, we believe investors may continue to stay on the sidelines.

3QFY15 results at lower end of expectations. AEON Credit Service’s (AEON  Credit)  3QFY15  net  profit  of  MYR48m  (+2%  QoQ,  +12%  YoY) was  at  the  lower  end  of  expectations,  with  9MFY15  net  profit  of MYR152m (+19% YoY) representing 72-73% of our and consensus full-year net profit estimates respectively.  

Results highlights. AEON Credit’s non-performing loan (NPL) ratio rose further  this  quarter  to  3.07%  from  2.65%  at  end-2QFY15  (3QFY14: 2.02%).  However,  net  impairment  allowances  for  receivables  were relatively stable QoQ at MYR52m (+37% YoY), as the marginal uptick in impairment  losses  on  receivables  was  cushioned  by  slightly  better recoveries during the quarter. Hence, impairment allowances/receivables eased to 4.81% (2QFY15: 5.05%; 3QFY14: 4.66%). Otherwise, 3QFY15 pre-impairment  profit  was  up  2%  QoQ  (+16%  YoY)  mainly  due  to continued  growth  in  receivables  of  16%  QoQ/31%  YoY,  led  by  vehicle financing. Net interest margin (NIM), however, dropped by an estimated 50bps QoQ/130bps YoY due to the relatively stronger growth in vehicle financing, where yields are typically lower than the rest of the receivables booked, and higher funding cost from new borrowings during the quarter.  

Forecasts.  Due  to  the  continued  rise  in  NPLs,  we  raise  our  FY15-16 impairment allowance for receivables by 5-10%. We also lower our FY16 revenue  projection  by  3%  to  be  consistent  with  the  softer  macro environment  that  we  now  expect  for  2015.  Overall,  we  trim  our FY15/FY16  net  profit  projections  by  3%/7%  respectively.  We  also introduce our FY17 numbers in this report.  

Investment case. We lower our target FY16 P/E to  7.5x from  10.5x to reflect potential concerns regarding AEON Credit’s rising NPLs. Our revised  target  P/E  is  based  on  1SD  below  the stock’s average  P/E (previous  target  multiple  based  on  a  5-year  average  P/E).  Overall,  our TP  is  cut  to  MYR12.00  from  MYR18.00  but  our  NEUTRAL  call  is unchanged.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

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

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Source: RHB