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Aeon Credit an attractive alternative stock to sector
KUCHING: Aeon Credit Service (M) Bhd (Aeon Credit) high performing return on equity (ROE) generation of over 20 per cent has made in a favourable alternative to the banking sector.
Aeon Credit’ healthy receivable growth and improving asset quality are also key contributors to this growing sentiment focused in a recent company update on Aeoncs by the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Capital).
Looking at its receivables growth, the research arm expects Aeon Credit to grow at a steady 19 per cent in their financial year 2017 estimates (FY17E), 18 per cent FY18E, and 16 per cent FY19E.
Reasoning for these estimates are based on expectations that Aeoncs’ receivables will be driven by internal factors such as expansion in the personal financing space, further penetration into the high yielding small medium enterprise (SME) segment, the cross-selling of financial products Aeon’s existing customers, and expansion of customer service centres,
Additionally, the signing up of new merchant agreements which would also help drive fee income growth.
For external actors, the research arm has stated that the recent hike in civil servant wages would be an added bonus to Aeoncs receivables as it would boost consumption spending.
“The spill over effect will be on purchases of small ticket items such as electrical goods, electronic and IT gadgets, household furniture as well as increased the affordability to borrow personal loans,” explained the research arm.
In asset quality, Aeon Credit has continued to demonstrate a trend of consistent improvement since its peak in September-November in 2015 at 3.07 per cent.
The research arm affirmed their belief that this positive trend is a result of Aeoncs’s strict and prudent management on credit risk practices and their strong understanding of the consumer financing business.
As such, Affin Hwang Capital has estimated that the trend will continue into FY17 to 19.
“To further enhance its collection system, Aeon Credit has also started self-service kiosks with ATMs, cash-deposit machines and digital devices for its customers in 201,”added the research arm.
Additionally, the overall net credit cost has been slowly decreasing year-on-year and as a result, the research arm has predicted that for 2QFY17 results, “it will not be a surprise to potentially see some slight uptick in the net profit loss (NPL) ratio and credit cost since the quarter coincided with the Raya festival”.
“Based on 1QFY17’s results, the gross NPL ratio was down by five basis points (bps) quarter on quarter to 2.42 per cent, while on a YoY, it declined by 32 bps amidst a healthy growth in receivables to RM5.8 billion.”
When compared to the banking industry’s household sector gross impaired loan ratios, it should be noted that Aeoncs’ gross net profit loss (NPL) ratio is higher as their portfolio of receivable are in riskier assets and non collateralised.
Despite this, Aeoncs cash flows are compensated by a higher effective interest rate of around 16 to 17 per cent against a borrowing cost of 4.2 per cent.
While there has also been some concern regarding defaults among lower income borrowers in the non-banking financial institutions, the research explains that these issues are mostly triggered by the abundant availability of easy credit with long tenures of up to 25 years.
Additionally, it should be noted that the trend of easy personal financing schemes back in July 2013, did not affect Aeoncs in a significant way.
“This was due to Aeoncs’ management in-depth understanding of the consumer-financing business, adhering to proper risk management underpinned by tight credit approvals, strict scoring system as well as its prompt collection practices” explained the research arm.
As such, the research arm has opted to maintain their ‘Buy’ rating for Aeoncs while raising their price targe to RM16.60 from RM14.50.
While the research arm has had strong justification for their positive outlook on Aeoncs, investors should note that he current dizzying household debt to gross domestic product (GDP) of 89.1 per cent is a key risk to Affin Hwang Capital’s forecast.
“The central bank may undertake further tightening measures to control excessive growth in household debt subsequent to curbs that were imposed in 2013 on personal-loan tenures on all banks and non-banks as well as tighter limits on credit-card spending.
“Should more regulations be imposed, our FY17-19E forecasts could be negatively affected.”
Earnings still on a growth path: ACSM recorded a NP growth of +10% y-y in FY16 (Feb yr-end), +8% y-y for 1QFY17 and based on street estimates, growth is expected to continue with +6.2% y-y/+7.3% y-y FY17E/FY18E (despite earnings contraction within the banking sector). In my view, there is potentially upside risk to these numbers (volume growth), as ACSM’s target market are more sensitive to interest rate cuts (we expect another 50bps) and fiscal measures targeted for the low-middle income, which we expect in 2H16, i.e. min wage & civil servant wage increases, reduction in EPF contribution, more BR1M payouts.
Growth much stronger for underlying receivables growth, versus the 8-10% NP growth and according to management is on track to grow +20% y-y in FY17E, (FY16: +20% y-y; 1QFY17: +21% y-y to RM5.8bn). Motorcycle financing (29.9% of receivables), auto financing (29.5% of receivables) and personal financing (22.4% of receivables) are the three top categories. We do note that there is some conscious slowing down in general easy payment (GEP i.e. white goods financing) and used car financing and a greater emphasis on personal financing and credit cards (~200k cards in circulation).
Slowing economy, yet NPLs declined to 2.42% 1QFY17 (from 2.74% in 1Q16), due to ACSM’s prudent risk management policies and in-house expertise and processes having been in the business for over 20 years. Mr Lee believes that borrowers typically will continue repaying as long as they are employed. Classification of NPL happens after 3 months of non-payment, written-off after 6 months of non-payment. Net credit costs also fell to 3.32%, the lowest in 9 quarters.
No real competitor as ACSM is sandwiched between money-lenders and banks, with >70% of its c.1mn customer base earning < RM3,000/mth and coupled with the average loan ticket size of RM8,000 and average tenure of 4 years, ACSM is in a segment which does not interest the banks.It’s direct competitors are Bank Rakyat (unlisted) and MBSB (MBS MK, RM0.86, NR) but both have been unsuccessful in migrating from super-safe civil servant salary deduction lending to the “free market” i.e. ACSM makes about 13-15mn calls a year to customers to remind them to pay on time. Parkson Credit, Singer Credit, Wilayah Credit also offer consumer financing and motorcycle financing but we understand are much smaller places in this space.
Not as strictly regulated unlike the banks, ACSM only needs to ensure its capital ratio (total equity/receivables) does not fall < 16% as required for all credit card issuers.ACSM is given the freedom to set pricing, with gross yield from 14% for used car financing to as much as 27% for general easy payment.
Beneficiary of lower interest rates? ACSM will not immediately benefit from declining interest rates in terms of lowering its funding cost as close to 70% of its funding is fixed-rate (to match its fixed rate lending base) and locked in for 5-6 years from Japanese banks (LT fixed-rate at c.4.28% which is way better than any local bank offers) and the balance (which will benefit from lower interest rates), 30% from local banks (more ST facilities), for an average funding cost of around 4.2%. This is against the overall gross yield for ACSM at ~20%. Lower interest rates should improve demand and a relief for their customers.
Trading at 8.3-8.7x PER, below market average 15x, with 29% ROE and 4.2-4.6% div yield: Adjusting for RM14.4mn/p.a. distribution paid to perpetual note holders (below net earnings line), ACSM is trading at trading at 8.4-8.7x ann. 1QFY17/FY17E PER or 8.3x FY18E based on consensus estimates, offering a 4.2%/4.6% FY17E/18E dividend yield. ROE were ~35% in FY2014/15 but is lower ~29% in FY16.