KUCHING: AEON Credit Service (M) Bhd (AEON Credit) is envisaged to sustain its respectable loans growth while keeping asset quality via prudent risk management.
Hinting at a possible upward re-rating for the group, OSK Research Sdn Bhd (OSK Research) observed that the group was changing focus from low-income customers who primarily use its cards for cash advance purchases to middle-class customers who use its cards for purchases.
“Although this client segment is more price-sensitive and considerably more credit-worthy – which will translate into lower net interest margins – the company would be able to reduce the overall credit risk of its receivables.
“Nonetheless, its overall profitability would still be preserved as management intends to increase the average loan amount to this group of customers.”
AEON Credit recently reported annualised earnings that were slightly below OSK Research’s earnings forecast, accounting for 93.8 per cent of the research house’s full-year forecast.
Its net profit grew 46.4 per cent year-on-year (y-o-y), underpinned by stronger operating income from its credit card business (up 34 per cent y-o-y) and the personal financing business (up 112 per cent y-o-y).
Meanwhile, AEON Credit had teamed up with Edelweiss Capital to set up AEON Credit Service India, as part of plans to expand in Asia, with an initial capital expenditure of some US$7 million.
The subsidiary was set up with the aim of tapping into India’s growing economy, which AEON Credit identified as a key market in which it could replicate its successful business model.
OSK Research did not expect any contributions from the Indian venture for the next three to four years as “management intends to devote the first three years to establish a proper infrastructure and study the market behaviour of consumers in this country (India),” it clarified.
On the home front, interest margins were high and showed little sign of deterioration, particularly since most bank competitors were not competing directly with its business.
The low interest rate environment also benefitted its funding cost which stood at some 4.2 per cent as at the first quarter of financial year 2013 (1QFY13), ending February.
“We believe that the high interest rates it earns (23 to 25 per cent on average across all products) will cushion the impact if its funding cost increases and thus maintain its strong net interest income,” OSK Research opined.
The research house noted that AEON Credit had an attractive gross dividend yield of 4.4 per cent and 5.6 per cent for FY13 and FY14 respectively, based on its current share price of RM11.26.
The company was very well capitalised and OSK Research expect a net dividend payout ratio of 37 per cent for both FY13 and FY14 respectively.
“While we deem the stock fairly valued for now at 10 times its 12-month forward price earnings ratio (PER), we see potential for a further rerating given its superior earnings growth, return on equity and return on assets.
“We think that it could potentially trade at 11 to 12 times PER if the company reports consistent earnings in the next few quarters,” OSK Research opined as it maintained the fair value of RM10.70 per share for the group.