AEON Credit Services - No Significant Synergies

ACSM's shares have rallied since Aeon Co Ltd bought Carrefour Malaysia to expand its Malaysian operations on investors’ belief that the group may benefit from the resulting synergies in the long run. Management has yet to offer guidance, but we believe that such synergy will boost ACSM's profits marginally by 1.8%-2.6%, assuming only 2% of Aeon customers use its easy payment and personal financing schemes, and 7.5% of Aeon card members have its credit cards. Leaving our forecasts unchanged, we roll over our valuation to a full-year FY14 EPS, from which we derive a new FV of RM14.00. Maintain NEUTRAL.

Carrefour to become AEON BIG. Japan Aeon Co Ltd recently confirmed its purchase of Carrefour Malaysia's operations for an enterprise value of RM990.2m. According to press statements, the latter's present business will be run as a separate entity from Aeon Malaysia under the name Aeon Big (M) SB, focusing on a different customer segment as a hypermarket chain.

Potential synergies likely to be insignificant. We think Aeon Credit Services Malaysia (ACSM) could directly benefit from Aeon Co Ltd's enlarged Malaysian operations, mainly because the enlarged platform and combined customer base will give it a bigger market to cross-sell its credit cards and easy payment schemes. The addition of Carrefour Malaysia's 26 hypermarkets will increase Aeon's total number of Malaysian stores to 55, and bump up its market ranking from third place to the second largest retailer in terms of sales. However, we think that the synergies are not significant, as
there is a low penetration rate among AEON customers who uses ACSM’s services, Carrefour Malaysia already offers ACSM's general easy payment (GEP) scheme, and there will be some degree of overlap between Aeon and Carrefour customers. Based on our assumptions, the potential profit upside is estimated at around 1.8%-2.6% for FY14.

No financial impact. Aeon Co Ltd has confirmed that there will be no material impact on ACSM's financials as the transaction cost was incurred at the group level.

Rolling over our forecasts. As we are not incorporating the assumptions into our valuations, we are maintaining our earnings forecasts as the potential impact is still uncertain. However, we are rolling over to full-year FY14 EPS to arrive at a RM14.00 FV, pegged to a 13.3x forward FY14 EPS (previous FV pegged to 13x forward EPS). Our forward PE assumption is based on mother company Aeon Credit Service Co Ltd’s two-year PE band of 17.6x, but with a discount owing to loss of control (DLOC). Our new FV implies a 6.0% upside from the current share price.

OUR ASSUMPTIONS

Credit card, easy payment scheme to reap synergies. Our assumptions, mainly based on comparative figures for Aeon, are: i) about 7.5% of the estimated 1m Aeon Card members are also ACSM's credit card holders, and ii) 2% of the customers of ACSM easy payment schemes are also Aeon customers. This will translate into an upside of about 1.8%-2.6% to ACSM's FY14 net profit earnings based on two scenarios.

We have not taken into account: i) further cross-selling synergies as a result of product differentiation, ii) the exclusivity of ACSM's credit card sale booths at Aeon Big stores, and iii) a potentially enlarged merchant base. We do not foresee major synergies from the overseas operations of the Aeon Group nor the enlarged overseas operations as a result of the injection of Carrefour's units.

Downside risks to our assumptions. We think the synergies hold more downside than upside risks. These are: i) a higher-than-expected number of non-performing malls will be closed down, thereby reducing the avenues for ACSM to cross-sell its products, ii) Aeon Co Ltd's change in decision in regard to Aeon Big's business direction may not benefit ACSM, iii) the degree of overlap between Aeon's and Carrefour's customers, and iv) Carrefour already provides easy payment offerings that are a part of ACSM's GEP services.

Business direction intact. We believe ACSM's business direction is intact despite the recent changes and are of the view that the potential synergies are unlikely be significant. The company's unique market positioning (ie having its own credit card) sets it apart from other super- or hypermarkets which have tie-ups with banks, for instance Tesco-RHB and Giant-Citibank. Given the still-low penetration of Aeon customers using ACSM's services, we believe there is ample untapped market potential. This, coupled with the positive outlook for the consumer sector, should boost ACSM's earnings growth as long as capital management remains intact, whether or not Carrefour is in the picture.

Source: OSK