Aeon Credit targets ‘stable and consistent’ expansion in FY24

AEON Credit Service (M) Bhd is targeting a stable and consistent expansion in its key segments for the coming financial year, but may see strains in collection as it grows its books. 

In a research note on the counter released two weeks ago after a result briefing, Kenanga Investment Bank Bhd (Kenanga Research) noted possible risks to its non-performing loans (NPL), but said it would not be detrimental to overall earnings growth. 

“Although we tone down our earnings forecasts for more aggressive credit cost pressures and lower return on equity (RoE) inputs, the stock still offers growth opportunities and is a proxy away from deposits competition faced by full-fledged banks,” it said in the note with an ‘Outperform’ tag for the stock with a 52-week target price of RM16.15. The stock closed at RM12.12 last Friday. 

Against other traditional financiers, it said Aeon Credit still commands a stronger RoE when compared to banks’ average of 11%, whilst being able to operate with stable interest margins as its funds are not derived from deposits. 

“We expect sentiment for the stock to improve with subsequent updates as a proxy to better GDP output and with its Islamic digital banking licence allowing them to propose new value propositions to customers,” it said. 

For the financial year ended Feb 28, 2023 (FY23), Aeon Credit net profit was up 14.3% to RM417.69 million compared to the year-earlier on the back of RM1.64 billion in turnover. 

Total transaction and financing volume for the financial year-to-date (YTD) grew by 31% to RM6.25 billion compared to corresponding preceding year, the company said in an exchange filing. 

The group recorded a higher pretax profit of RM546.98 million for FY23 compared to RM526.82 million in the preceding YTD, mainly due to the incremental increase in revenue and bad debt recoveries of RM115.37 million and RM25.3 million respectively, coupled with the reduction in operating expenses of RM28.08 million. 

However, this was offset by higher impairment losses on financing receivables by RM144.55 million. Loan loss coverage ratio stood at 252% as at Feb 28, 2023, compared to 289% as at Feb 28, 2022. 

Based on the briefing, Kenanga Research report said that the company was hopeful for sustained financing growth for FY24, replicating the 10% growth in gross financing delivered in FY23. 

“This could be driven by continued demand for mopeds in its motor segment (35% of total books), thanks to direct partnerships and merchant incentives to funnel high-quality accounts. The personal financing segment could also gain from the launch of the group’s digital onboarding, allowing more seamless acquisition. 

“Meanwhile, closer collaboration with Aeon Retail Co Ltd could translate to greater credit card transaction volumes,” it said. 

It noted that NPL could stretch from a larger book. 

“We believe that inflationary pressures could deteriorate customer cashflows and trigger missed repayments. That said, the group opines that it will not be overly affected should this materialise. The group still holds loan loss coverage of 252% in FY23 with management overlay provisions of RM105 million,” it said. 

Kenanga Research also noted that the group indicated plans to further bolster its digital capabilities, including kickstarting a migration to cloud-based systems with higher investments on electronic know-your-customer (e-KYC) to smoothen onboarding. 

It said the proposed joint venture with MoneyLion to build its digital banking platform has been terminated, and Aeon Credit has sought an alternative technology partner. 

“It appears to us that the Aeon Group may be taking ownership of the full ecosystem. For the time being, both the Aeon e-wallet and digital bank will operate in isolation but integration could be an eventual plan,” it said. 

Aeon Credit, which gained listing in 2007, commenced operations in 1997 by providing easy payment schemes for purchase of consumer durables through appointed retail merchants and chain stores. 

In September 2021, Aeon Credit completed the acquisition of 100% equity interest in an insurance broking firm, Insurepro Sdn Bhd, which allowed Aeon Credit and its subsidiary to distribute both conventional and takaful insurance products, including life insurance products by leveraging on the Aeon Group Retail network and ecosystem. 

Today, the business of the group has expanded to include issuance of credit cards, prepaid cards, Aeon Wallet App, easy payment schemes, and other related services. — TMR

  • This article first appeared in The Malaysian Reserve weekly print edition