• Keep BUY and MYR7 TP, 24% upside and c.4% FY25F (Feb) yield. AEON Credit Service’s 9MFY24 results were in line with expectations. While higher bad debt write-offs in 3QFY24 subdued the bottomline performance, strong income growth and the subsequent improvement in the NPL ratio are positive takeaways from the set. We maintain our forecasts and MYR7 TP (includes a 2% ESG premium) pending the analyst briefing later today.

• Results review. ACSM’s 9MFY24 net profit of MYR300.1m (-5% YoY) came in at 73% and 72% of our and Street full-year estimates – in line, pending a seasonally strong 4Q. Total operating income surged 18% YoY on robust receivables growth (+12%), but was met with greater credit costs of 3.7% (9MFY23: 2.5%) – recall that there was a net write-back in 1QFY23. On a quarterly basis, PIOP increased 6% QoQ (YoY: +21%) on income growth of 3% (YoY: +17%) and lower opex by 3% (YoY: +11%). However, credit costs jumped >2ppts sequentially to 4.7% in 3QFY24 due to higher write-offs. 9MFY24 ROE of 16.5% (9MFY23: 19.9%) is tracking ahead of the 15% guidance.

• Robust receivables growth. YoY growth of 12% (QoQ: +3%) is above the target level of c.10% for the year. The growth predominantly came from objective financing and personal financing (both >20% YoY), while growth was deliberately slower for motorcycle financing (+4% YoY), due to its weaker asset quality tendencies. We foresee the group surpassing its 10% target for the full year, particularly as its strategic marketing campaigns have generated decent success at garnering financing applications among higher credit-score customers. Coupled with its digital credit assessment and onboarding initiatives, disbursements could accelerate and keep the receivables growth momentum going for longer.

• Asset quality – continued drop in NPLs. The sequentially higher credit costs of 4.7% in 3QFY24 (2Q: 2.6%) was largely due to a 12% QoQ increase in write-offs of legacy bad debts. As a result, the NPL ratio dropped further to 2.7% (2Q: 3.0%), and now falls below the guidance of 3-4%. Consequently, LLC improved to 233% (2Q: 219%), and remains within the group’s 200-250% comfort range. ACSM’s focus on higher credit score customers appears to be bearing fruit, and credit costs could stabilise to the pre-pandemic average of 3-4% in the near future.

• Forecasts and TP maintained, pending the analyst briefing later today. The counter’s current P/BV of 1.0x is a far cry from its peers’ 1.2-2.6x – unjustified in our view, given its strong ROE generation of >15% and bright growth prospects among higher quality customers. ACSM is a Top Pick within the non-banking financial institution or NBFI sector, and could potentially see laggard share price improvements in CY24, especially if startup losses from its digital banking venture turn out lower than expected. Our forecasts bake in MYR30m in startup losses for FY25F and FY26F. 

Source: RHB Securities Research - 22 Dec 2023