• Stay NEUTRAL and GGM-derived MYR16.20 TP, 7% upside and 3% FY23F (Feb) yield. We are positive on Aeon Credit Service’s foray into the Islamic digital banking space as a way to expand its products offerings and earnings base. However, near-to-mid-term losses are expected from its 45% JV stake in the AEON consortium. At 1.7x P/BV against a ROE of 17.3%, we think the valuation is fair, with recovery prospects well priced in. We advocate investors to nibble on share price weakness.

• Islamic digital banking license winner. The AEON consortium comprises ACSM, its holding company AEON Financial Services (AFS), and technology partner MoneyLion (MLI) (Figure 1). AEON Credit and AFS will each hold 45% stake in the proposed Islamic digital bank JV, with the remaining 10% equity held by MLI. The Islamic digital bank license vs the conventional counterpart better complements ACSM’s existing clientele base as the majority of its customers are Muslim. Its existing financing products are also based on shariah principles.

• Strategy. Once operational, the immediate-term strategy is to tap into the strengths of AEON Co M (AEON MK, NEUTRAL, TP: MYR1.41) and ACSM’s existing ecosystem, ie the AEON Living Zone (Figure 2). The consortium will leverage off MLI’s experiences and technologies in the digital banking space while further localising the latter to cater for the local market and comply with regulations. Management is fairly confident on ACSM’s targeted 13-15 months’ time to market vs the 24 months set by Bank Negara Malaysia.

• Prospective products. We understand the digital bank will offer micro lending (small ticket sizes with high frequency) and wealth management products (data-driven hyper-personalised services) that reduces cannibalisation risk across ACSM’s existing products, given the different target markets and product offerings. Conversely, deposits could be sourced from existing customers on loyalty programmes (mainly retail clients) and customers from AEON’s other business lines, eg merchants. With this, management expects acquisition costs for the digital bank to be lower vis-à-vis competitors without existing clientele.

• Impact. ACSM is likely to record near-mid-term losses from its JV stake in the consortium. Despite that, management targets to the digital bank to break even by Year 5 and turn around the accumulated losses by Year 8. Initial capital raised will be via internally generated funds.

• No changes to our forecast and TP. At this juncture, the potential earnings impact from the digital bank JV has not been factored into our forecast. Our MYR16.20 TP takes into account a 4% ESG premium for ACSM’s 3.2 ESG score based on our in-house methodology.

Source: RHB Research - 17 May 2022