We retain our NEUTRAL call and MYR13.40 TP, implying 6% downside. AEON Credit had a commendable quarte, considering the impact from the GST implementation. Receivables growth was resilient while asset quality was stable QoQ, but impairment allowance for receivables spiked. Growth momentum is expected to pick up in 2HFY16 (Feb), but we would watch out for asset quality issues as the festive period nears.

Broadly in line. AEON Credit’s 1QFY16 net profit of MYR58m (+4% YoY, -9% QoQ) was broadly within expectations, accounting for 24% of our and 25% of consensus estimates.

Results highlights. Positive takeaways were: i) receivables growth was healthy (+22% YoY, +3% QoQ) despite the implementation of the goods and services tax (GST), ii) gross non-performing loans (NPL) ratio was broadly stable QoQ at 2.74% (1QFY15: 2.18%), and iii) operating costswere well contained leading to an improved cost-to-income ratio of 34% (4QFY15: 38%; 1QFY15: 36%). Flipside, the net interest margin (NIM) compressed by an estimated 160bps YoY (-200bps QoQ) due to pressure on average asset yield. Impairment allowance/receivables jumped to 4.73% (4QFY15: 3.86%, 1QFY15: 3.90%) – possibly a reflection of last year’s deterioration in asset quality sta rting to feed into the company’s impairment models.

Outlook. As management expects that it may take 3-6 months for consumer consuption to recover post the implementation of GST, it believes 2HFY16 should be better. Credit underwriting standards have tightened following the spike in NPL incidences last year and management is hopeful that the gross NPL ratio remains stable at current levels. That said, we would not be surprised if NPLs tick up in the near term due to the upcoming festivities. Finally, we understand that rates for certain products (e.g. general easy payment, motorbike and personal loans) have been repriced up by around 100bps. The near-term impact, however, would not be significant as the repricing only applies to new loans.

Forecasts. No change to our earnings forecasts.

Still NEUTRAL. We maintain our TP of MYR13.40, which is based on a target FY16 P/E of 8x. Our target P/E is still based on 1SD below the stock’s average P/E to reflect potential asset quality concerns.