This article first appeared in The Edge Financial Daily, on October 8, 2015.

Aeon Credit Service (M) Bhd
(Oct 7, RM13.66)
Maintain buy with a lower target price of RM14.80 from RM16.10: Aeon Credit Service reported its first half of financial year 2016 (1HFY16) profit after tax of RM106.7 million while net profit attributable to ordinary equity holders was down 3.6% year-on-year (y-o-y).

Results were in line with consensus, but below our expectations by about 10% as second quarter of financial year 2016 (2QFY16) was affected by slower revenue growth quarter-on-quarter (q-o-q), driven by lower annualised receivables growth of 16.6% versus our projection of 23%.

Overall, 2QFY16’s earnings were 17% weaker q-o-q owing to higher impairment loss and lower recoveries, which is partially attributable to the Hari Raya festive season in July 2015.

Meanwhile, an increase in finance cost for 1HFY16 also capped pre-tax profit expansion, which grew by a marginal 1.1% y-o-y.

On a positive note, we anticipate earnings to recover in 2HFY16 as consumer spending normalises post-goods and services tax and better collection efforts in 2HFY16.

Gross non-performing loans (NPL) ratio improved to 2.58% in 2QFY16 from 2.74% in 2QFY15, despite our concerns about rising defaults among the lower income group.

An interim dividend of 29.85 sen has been proposed.

We are currently lowering our receivables growth rate to between 20% and 21% from 20% and 25% per annum for FY16 to FY18, but maintain our internal rate of return assumption  between 15.6% and 17% for the receivables.

Hence, our FY16 to FY18 net profit forecasts have been slashed by 6% to 11%. — Affin Hwang Capital Research, Oct 7