KUALA LUMPUR (June 26): A continuously challenging economic environment is expected to result in more provisioning for AEON Credit Service (M) Bhd.

In a note, Kenanga Research's Ahmad Ramzani Ramli said that throughout its financial year 2020, the company has been coping with poorer reported earnings due to more stringent requirements set by Malaysian Financial Reporting Standard 9 rules.

Looking forward, he opined that it will face more hurdles due to Covid-19 and prolonged economic challenges.

"Locally, the implemented MCO (Movement Control Order) is likely to gag receivables growth at least in the first quarter. While [AEON Credit] is a non-bank credit provider and does not need to adhere to the six months' moratorium, it has offered to allow a one-month deferment of payment for its customers," he said.

Additionally, a strained economic climate is likely to result in AEON Credit's non-performing loan (NPL) ratio being stressed ahead, albeit from a low base of below 2%.

The Kenanga Research analyst said that this is likely to be the case given the group's high bottom 40 mix, which the research house believes is at least half of AEON Credit's customer profile.

Ahmad has maintained his "Market Perform" and target price (TP) of RM8.80 on the counter, ascribing it an eight times FY21 price-to-earnings (PE) ratio.

"Our more conservative valuation is premised on a challenging market environment and we also do not discount the possibility of higher provisioning and NPLs given the economic downturn," he said.

For Affin Hwang Capital Research's Tan Ei Leen, asset quality will be the focus for AEON Credit's FY21, as the risk of further deterioration in the unemployment rate to 5% in April 2020 and potentially 8% by the end of the year could drive up provisions.

"As at 1QFY21 (first quarter of FY21), [Aeon Credit's] gross NPL ratio saw an improvement to 1.42% vs 1.92% (4QFY20), as outstanding NPLs remained relatively unchanged [quarter-on-quarter]," said Tan, adding that the impairments that dragged AEON Credit's 1QFY21 numbers could be potentially reversed as arrears are gradually settled.

"Reiterate 'buy' on [AEON Credit], with our TP unchanged at RM12.30 (based on a PE target of 13 times on CY21E [earnings per share] of 94.6 sen).

"We look forward to a recovery year in FY22, underpinned by recovery in receivables growth of 9% y-o-y (year-on-year) (vs -4% y-o-y in FY21E) and a lower net credit cost of 334bps (vs 353bps in FY21E, under review). Downside risks: weaker asset quality and receivables growth," the Affin Hwang analyst said.

AEON Credit saw its 1QFY21 earnings drop 69% y-o-y to RM26.28 million, from RM84.6 million due to the higher allowance for impairment loss and lower income due to the MCO implemented following the Covid-19 outbreak.

Impairment loss on financing receivables jumped to RM174.37 million, from RM93.34 million a year prior. Quarterly revenue was up 2% higher at RM385.27 million, from RM378.59 million last year.

Shares in AEON Credit were down 0.62% or six sen at RM9.62 as at 11.50am, valuing the lender at some RM2.44 billion. It saw 151,100 shares transacted.

The counter has risen 22.39% from its low of RM7.86 on March 23, but is still down 32.44% year to date.