AEON Credit growth pace to remain robust, says analysts

0

KUCHING: AEON Credit Service (M) Bhd’s (AEON Credit) growth trajectory is expected to remain strong despite weakening consumer sentiments and a challenging business environment.

Kenanga Investment Bank Bhd’s research division (Kenanga Research) in a recent note, highlighted that due to a weaker consumer sentiment and higher percentage of current year receivables (43 per cent in the financial year 2014 versus 49.5 per cent in financial year 2013) and a more challenging business environment, it reckoned that the growth in gross financing receivables will inevitably slow down substantially.

However, it noted, “We believe AEON Credit could probably expand its financing receivables in high-teen, say 19 per cent, in coming financial year. However, this represents a sharp decline in growth as opposed to growth of 52.2 per cent in the financial year 2014 (FY14).”

“We also expect the trend of interest margin compression to continue. In fact, we have factored in an aggressive net interest margin (NIM) squeeze of circa 90 basis points (bps) in FY15.

“We also expect other operating incomes to decline marginally in FY15 inline with a lower total transaction growth assumption of a six per cent decline versus 31.4 per cent year-on-year (y-o-y) growth in FY14,” it further opined.

Kenanga Research said that as the group has been able to demonstrate a clear-cut downtrend in cost to income ratio (CIR), it has also factored in a lower CIR of approximately 36.7 per cent in our forecast as opposed to circa 37.6 per cent in FY14.

“We understand that AEON Credit has taken necessary measures to review credit scorecard and credit processes. As such, we could probably see lower credit cost in FY15.

“We have imputed a circa 25bps reduction in credit cost,” it explained.

Aside from that, as at end-Feb 2014, the capital adequacy ratio (CAR) of the group is estimated at circa 18 per cent.

The research firm believed that this ratio is lower as compared to the average of 25 per cent from the financial year end of 2008 to 2012.

“As AEON Credit had established a RM800 million Perpetual Notes Programmes in FY14 with objectives to support the business expansion and to meet the capital ratio requirement, we do not rule out further utilisation of these Perpetual Notes.

“Based on our estimate, the group could draw down another RM300m in Perpetual Notes in order to maintain its CAR at 25 per cent.

“The implication of this move will translate into higher interest cost and lower returns on equity (ROE),” it opined.

Meanwhile, RHB Research Sdn Bhd (RHB Research) in a separate note, pointed out that AEON Credit’s non-performing loan (NPL) ratio has reached a five-year high of 2.14 per cent from 1.56 per cent in the first quarter of 2014 (1Q14).

“While no further details were given, we gather that collection ratios for some segments within vehicle easy payment dropped due to its exposure to low-income customers.

“This is in line with recent industry data of rising non-performing loan (NPL) in vehicle financing. The company is enhancing its credit scoring system and tightening approval criteria, depending on economic conditions.

“AEON Credit is expected to maintain its competitive pricing,” it viewed.

On its FY15 outlook, RHB Research noted that the group aims to enhance its growth via AEON BIG.

It said that the management aims to explore more cross-selling opportunities and fee income avenues in general easy payment, personal financing and insurance services to 1.02 million AEON BIG Point card members.

“A two-in-one co-brand credit card with AEON BIG is also scheduled to be launched.

“In a longer term, more online services, ecommerce solutions and related synergies will be explored, following the business direction of its parent company in Japan,” it explained.

Overall, RHB Research maintained a ‘buy’ call on the stock while Kenanga Research upgraded the stock’s call to ‘outperform’.