AEON Credit’s 1HFY13 earnings were within expectations, representing 47.1% and 47.6% of consensus and our full-year forecasts respectively. Revenue and net profit rose by 33.7% and 41.1% y-o-y, mainly underpinned by personal financing
(+116.6%), credit card (+28.6%) and motor easy payment (+25.7%). Asset quality is still resilient, with NPL ratio improving to 1.53% (1Q13: 1.68%) and CAR at a comfortable 19.4%. A 16.0 sen interim single tier dividend has been proposed. Maintain NEUTRAL, based on a FV of RM11.47.
(+116.6%), credit card (+28.6%) and motor easy payment (+25.7%). Asset quality is still resilient, with NPL ratio improving to 1.53% (1Q13: 1.68%) and CAR at a comfortable 19.4%. A 16.0 sen interim single tier dividend has been proposed. Maintain NEUTRAL, based on a FV of RM11.47.
Spot on result. 1HFY13 revenue and net profit grew by 33.7% and 41.1% y-o-y, in tandem with the 40% growth in overall transaction volume. All segmental revenues were largely within 47%-53% of our full year segmental forecasts. The credit card segment finally saw a rebound on q-o-q growth to a positive 6.6%, due to i) the expanded credit card base (1HFY13:162k vs FY12: 160k), and ii) improved customer sentiment, as highlighted in our earnings preview. General easy payment (GEP, y-o-y: +14.8%) was supported by increased merchant network from 4,535 in FY12 to 5,356 currently and 20% y-o-y boost in GEP transaction volume. Motorcycle easy payment (MEP, +25.7%) was boosted by 67% y-o-y growth in transaction volume, partly attributed to the significant increase of transaction volume in used car easy payment.
Capital ratios still comfortable. Capital ratios saw general compression due to the aggressive 41% y-o-y growth in receivables to RM1,887m, with capital adequacy ratio (CAR) compressed to 19.4% (FY12: 21.8%) and risk-weighted capital ratio (RWCR) compressed to 20.5% (FY12: 23.0%). However, they are still within a comfortable level above the minimum regulatory CAR requirements of 16.0%.
Asset quality resilient. The latest non-performing loans (NPLs) ratio improved 15bps to 1.53% this quarter (1QFY13: 1.68%), due to strong growth in receivables and prudent risk management policy. This is further supported by the improvement in net credit costs (minus bad debts recovery) from 3.29% in 1QFY13 to 2.98% in the current quarter. Loan loss reserve ratio remained around 125%.
Maintain NEUTRAL. We have pegged our FV at a 11x forward 12-month EPS. Our assumptions for the forward PER is based on a discount on the mother company Aeon Credit Service Co Ltd’s FY13f PER of 17x. Maintain Neutral with FV at RM11.47. Given the compression in CAR ratios, we have trimmed down our dividend forecasts to a payout ratio of 34% for FY14. We believe management is still able to maintain the 37% payout ratio for this financial year.
NIMs compression to be expected. The next stage of AEON Credit’s loans business mainly focuses on bigger ticket items, which tends to command lower interest margins. Hence, we expect to see some degree of NIMs compression likely coming from the MEP and personal financing segments coupled with increasing competition from bank-backed institutions, though management has indicated that gross yields should reach a comfortable level ~20%.
Fee income may see new growth drivers. The 44% y-o-y growth in other income in 1HFY13 was mainly attributed to impressive increases in collection agency businesses (126% y-o-y growth vs 2QFY12), especially from external clients, and insurance businesses (57% y-o-y growth vs 2QFY12). These segments are expected to continue their expansion. As part of its diversification strategy, management has also indicated that it desires to tap into their tenants and shoppers as a potential new customer base for its insurance business. On a longer term, AEON Credit is looking to venture into prepaid and internet businesses, similar to those carried out by AEON Credit Japan.
Platinum credit cards’ role in asset quality enhancement. AEON Credit’s plan to offer platinum credit cards to higher-income customers is expected to further enhance the company’s asset quality as these customers are deemed to have better credit profiles, thus improving its NPL ratio moving forward. We view this as a positive move, as credit cards tend to contribute more to NPLs due to their non-collateralized nature and consumers’ spending habits. This also should help AEON Credit improve its current credit cards revolvers ratio, which is as high as 80%, closer to the industry average.
Renegotiated/restructured receivables not a major concern. Recall from our previous note that the restructured receivables were at a manageable 1.8%-2.1% of overall receivables for FY11 and FY12. Management has indicated that the relapse tendency for these loans is very minimal and is unlikely to be reclassified back into NPL. Moreover, these loans will be deemed performing once the first payment has been made after restructuring. Note that AEON Credit usually classifies these receivables in the restructuring/renegotiated status upon the third month of non-repayment, but there were pre-emptive cases where the restructuring was done even before the three-month period.
Fee income may see new growth drivers. The 44% y-o-y growth in other income in 1HFY13 was mainly attributed to impressive increases in collection agency businesses (126% y-o-y growth vs 2QFY12), especially from external clients, and insurance businesses (57% y-o-y growth vs 2QFY12). These segments are expected to continue their expansion. As part of its diversification strategy, management has also indicated that it desires to tap into their tenants and shoppers as a potential new customer base for its insurance business. On a longer term, AEON Credit is looking to venture into prepaid and internet businesses, similar to those carried out by AEON Credit Japan.
Platinum credit cards’ role in asset quality enhancement. AEON Credit’s plan to offer platinum credit cards to higher-income customers is expected to further enhance the company’s asset quality as these customers are deemed to have better credit profiles, thus improving its NPL ratio moving forward. We view this as a positive move, as credit cards tend to contribute more to NPLs due to their non-collateralized nature and consumers’ spending habits. This also should help AEON Credit improve its current credit cards revolvers ratio, which is as high as 80%, closer to the industry average.
Renegotiated/restructured receivables not a major concern. Recall from our previous note that the restructured receivables were at a manageable 1.8%-2.1% of overall receivables for FY11 and FY12. Management has indicated that the relapse tendency for these loans is very minimal and is unlikely to be reclassified back into NPL. Moreover, these loans will be deemed performing once the first payment has been made after restructuring. Note that AEON Credit usually classifies these receivables in the restructuring/renegotiated status upon the third month of non-repayment, but there were pre-emptive cases where the restructuring was done even before the three-month period.
Source: OSK
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