March 10, 2011

AEONCR - Growth slowing down at Aeon Credit Service

Stock Name: AEONCR
Company Name: AEON CREDIT SERVICE (M) BHD
Research House: HWANGDBS

Aeon Credit Service (M) Bhd
(March 9, RM3.97)
Downgrade to hold at RM3.92 with target price reduced to RM4.20 (from RM4.60)
: We expect financing volumes for ACSM's two key business segments ' motorcycle easy payment (MEP) and general easy payment (GEP) ' to show healthy single-digit improvement quarter-on-quarter (q-o-q), while personal financing and credit card operations could have exceeded internal targets in 4QFY11. All in, ACSM should meet our loan growth projection and hit RM1 billion in FY11F with unearned interest income underpinning earnings visibility in FY12F/13F.

Rising interest rates normally mean higher interest cost for lenders like ACSM. But the net impact on net interest margin (NIM) may be lessened by its funding mix (64% fixed and 36% floating rate) and ability to adjust lending rates. Our sensitivity analysis shows that every 1% increase in average funding cost would reduce ACSM's FY12F/13F net profit by 1.5% to 1.7%.

Taking into account FY11 growth expectations, we trim our loan growth assumption for GEP and MEP to an average of 11% for FY12F/13F. In addition, we raise interest cost for floating loans by 50 basis points to reflect DBS Bank's expectation of overnight policy rate hikes in 2011. As a result, FY12F/13F earnings are cut by 6% to 7%.

Since its listing in December 2007, group net profit has been expanding at 41% compound annual growth rate (CAGR). But growth will start to slow because of a larger earnings base (FY10/FY13F CAGR of 14%). This has prompted us to change our valuation metric from a price-earning to growth ratio to price-earnings (PER). Applying a three-year historical average PER of seven times on FY12F earnings per share, we derive a lower target price of RM4.20 (from RM4.60). Downside risk is limited by its undemanding PER valuation and decent FY12F net dividend yield of 5.4%. Downgrade to 'hold' as the stock ' which has risen 5.1% year-to-date ' offers only 13% total potential return (including dividends). ' HwangDBS Vickers Research, March 9


This article appeared in The Edge Financial Daily, March 10, 2011.

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