This article first appeared in The Edge Financial Daily on December 18, 2017 - December 24, 2017

Aeon Credit Service (M) Bhd
(Dec 15, RM13.32)
Maintain buy with a higher target price (TP) of RM15.30: The upgrade in our TP on Aeon Credit Service (M) Bhd is due to the positive results of the “value chain transformation project”, which may potentially rerate its share price. There are revisions of 11.4% to 13.8% to our financial year ending Feb 28, 2018 (FY18) to FY20 earnings per share (EPS) due to additional shares from the conversion of irredeemable convertible unsecured loan stocks (ICULS).

We maintain a “buy”, noting that Aeon Credit is a high-growth, high-return financial stock, with a return on equity (ROE) in the high teens. Despite news of Aeon Credit being slapped with a RM96.8 million additional tax bill, management is of the view that the company has strong legal grounds to defend its position.

Aeon Credit embarked on its Value Chain Transformation project in FY17. It has also completed its cashless and paperless operations at 64 branches nationwide and stepped up digital applications, resulting in improved staff productivity and turnaround time.

Year 2018 catalysts — game changers for Aeon Credit would include Aeon Credit’s recent initiatives to enhance customer experience, including the promotion of the use of e-wallet and e-money cards, mobile wallet and the introduction of the Platinum credit card.

We believe that Aeon Credit will be a key beneficiary of Budget 2018’s 2% income tax reduction (for individuals earning RM20,000 to RM70,000 per annum) as its “Aeon Credit” brand is a household name in the provision of easy-payment schemes, motorcycle financing, and used-car financing, which may see greater demand in 2018. Acquisition of new merchants remains an ongoing process. Its recent tie-up with Lazada has enhanced the appeal of Aeon Credit with millennials.

Aeon Credit’s share price may potentially be rerated due to the ongoing digital transformation and marketing initiatives. We raise our TP from RM14.25 (based on nine times price-earnings ratio (PER) on calendar year 2018 earnings per share) to RM15.30 (based on a higher PER target of 13 times on CY18 EPS). Downside risks include a rise in defaults and subdued growth. — Affin Hwang Investment Bank Bhd, Dec 15