• Reiterate BUY, new MYR7.90 TP from MYR7, 18% upside with c.4% FY25F (Feb) yield. Post 4QFY24 results briefing, we gather that prospects for AEON Credit Service are positive heading into FY25F – receivables growth momentum is strong, and efforts to improve asset quality are beginning to bear fruit. We maintain our call on the counter for its robust receivables growth outlook helped by diversified offerings, on top of an attractive valuation – it is trading at 1.1x P/BV (-1SD) against a 15-16% ROE forecast.

• Optimistic on receivables growth. While the group’s FY25F receivables growth target is 10%, management thinks a 10-15% rate is possible, assuming borrowers are not significantly impacted by inflation and subsidy rationalisation. Growth in FY25F should still be driven by personal financing and credit cards, although the group plans to tap further into the superbike lending space to make up for the slower pace of growth in moped financing. The slowdown in moped financing is mostly deliberate, as moped customers tend to possess weaker credit quality credentials.

• Expecting more stable impairment write-offs. With an improved receivables portfolio from an asset quality perspective, ACSM is confident that impairment write-offs can reach a steady state of MYR150m per quarter from 2QFY25 – this translates to credit costs of c.3% pa. In the past, the group’s write-off charges fluctuated substantially (write-offs between 1QFY21 and 4QFY24 ranged between MYR28-178m), so we view the greater write-off stability as positive. In the meantime, collection trends appear resilient, and management will focus on implementing its risk-based collection strategy, especially for borrowers who are past due by 2-3 months.

• Dividend upside potential? ACSM hinted at potentially raising dividend payouts to beyond 30% in the future. Our calculations show that the group will need to raise payouts to 40-50% to bring yields up to 5-6%, which is the level of its closest peers. Existing capital levels are adequate to support such a transition (capital adequacy ratio >20% since FY21), and discussions are ongoing with board members and substantial shareholders.

• Digital bank updates. AEON Bank has begun accepting public applications for account openings, and the public launch of the bank’s app is slated for 2QCY24. After an initial savings account product, the bank’s priority will be to onboard SMEs within the AEON ecosystem and convert them into AEON Bank customers. Management revised its Year 1 (FY25F) share of losses guidance to MYR60-70m from MYR50-60m previously – this falls in line with the MYR16.6m loss booked in 4QFY24.

• Forecasts raised by 8-12% as we factor in more optimistic receivables growth assumptions. Our TP rises to MYR7.90, and includes a 2% ESG premium. Our DPS estimates are maintained for now.

Source: RHB Research - 12 Apr 2024