• Stay BUY, new MYR8.80 TP from MYR7.90, 18% upside, c.4% FY25F (Feb) yield. 1QFY25 results met our and consensus expectations. Financing receivables continued their strong growth momentum and asset quality indicators showed some YoY improvement, though opex – mostly revenue- linked items – were also on the rise. We continue to like AEON Credit Service for its strong growth outlook and decent valuation.

• Results review. 1QFY25 results came in line with our and Street’s expectations. NII grew 16% YoY, largely due to the strong 13% YoY growth in financing receivables, though CIR creeped up to 40% (1QFY24: 36%) after a 27% YoY increase in opex (personnel, advertising & promotions, and other expenses). Credit costs, however, reduced 0.7ppts to 3.2%, partly driven by better collection productivity. These led to a 7% increase in net profit despite the absence of associate losses in 1QFY24. On a QoQ basis, net profit was down 7%, mostly due to higher credit costs from a low base, though mitigated by lower associate losses.

• Receivables growth momentum maintained. Gross financing receivables grew 13% YoY, ahead of management’s +10% target for the year. Growth was driven by all segments except for SME financing – this was partly due to the successful implementation of the group’s artificial intelligence or AI- enabled credit scoring system to allow for faster turnaround times. Management reiterated its +10% target for the year, as it remains to be seen how the introduction of the Employees Provident Fund’s Account 3 will impact demand for ACSM’s personal financing products. Nevertheless, the group will continue to push for growth in that segment through digital marketing and employee incentives.

• NPL decline continues. ACSM recorded a NPL ratio of 2.46% as at May 2024, down 0.1ppt QoQ (YoY: -0.7ppts). The group attributes this to its numerous strategies aimed at improving collection productivity, including recruiting new external collection agencies and introducing nascent collection-linked incentives for staff. Credit costs have also shown a YoY decline, and management expects this to moderate further, while LLC remains ample at 222% (1QFY24: 227%, 4QFY24: 222%).

• Digital bank updates. AEON Bank had its public launch on 26 May with a savings account and debit card amongst its maiden products. The digital bank’s focus for the first year will be to gain traction among customers already within the AEON ecosystem. The share of the bank’s losses absorbed by ACSM stood at MYR11.6m (-30% QoQ) for the quarter – this falls short of management’s MYR60-70m guidance for the year. ACSM expects losses to widen in subsequent quarters as customer acquisitions pick up.

• No changes to our forecasts, as results were in line. After rolling forward our valuation year to CY25F, our TP is raised to MYR8.80 and includes a 2% ESG premium given ACSM’s 3.1 score vs the 3.0 country median.

Source: RHB Research - 12 Jul 2024