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StockStalk  |  JANUARY 5, 2016 11:30PM

Aeon Credit: Choppy waters seen ahead

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StockStalk instory imageAnalysts forecast choppy waters ahead for the financial services sector and that includes Aeon Credit Service (M) Bhd. Is there still value to be found in this low-key company?

Business model: Aeon Credit Service (M) Bhd is a non-bank financial institution (NBFI) involved in vehicle financing and consumer loans. Unlike commercial banks, NBFIs like Aeon Credit are not authorised to accept deposits.

According to its website, Aeon Credit was incorporated on Dec 6, 1996 and was converted into a public-limited company on Feb 9, 2007 and listed on the Main Market of Bursa Malaysia on Dec 12, 2007.

Aeon Credit began operations in 1997 by providing easy payment schemes for purchase of consumer durables such as electrical and electronic equipments, IT gadgets, furniture and the like, through appointed retail merchants and chain stores.

Today, its business includes credit card issuance, vehicle easy payment schemes for the purchase of motorcycles, cars and commercial vehicles, personal finance schemes, equipment financing for small and medium enterprises, insurance, and other services.

Shareholders and management: According to Bursamarketplace.com, Japan-based Aeon Financial Service Co Ltd is the parent company with a 61.9% stake in Aeon Credit. Other shareholders include the Employees Provident Fund (2.8%) and Aberdeen Asset Management Plc (1.96%).

Helming the company is managing director Kenji Fujita, who was appointed executive director in June 2013 and managing director in June 2014. He has a Bachelor’s degree in Arts & Humanity from Yamaguchi University, Japan in 1992 and a Master of Business Administration degree from International University of Japan in 2009.

He began his career at Aeon Co, Ltd, Japan in 1979 and was subsequently transferred to Aeon Co (M) Bhd in 1997. He served in the business development function, managing director’s office and shopping centre (SC) development functions over the years before he was appointed as the general manager of SC development in 2005.

From 2007 until early 2012, he was managing the human resource, administration, finance and executive office functions in Aeon Co, Ltd, Japan and Aeon Stores (Hong Kong) Co, Ltd, Hong Kong. In March 2012, he was transferred to Aeon Financial Service Co, Ltd, Japan and was appointed as executive director of Aeon Financial Service (Hong Kong) Co, Ltd, in June 2012, prior to his transfer to Aeon Credit in June 2013.

aeon credit 1 yr 05012016Share performance: Aeon Credit’s share price has performed positively over the past year; as of Jan 5, it had a one-year return of 3.8% according to Bloomberg data. This outperformed the FBM KLCI index, which had a one-year return of -1.37% as of the same date. Reuters data showed that the stock has a beta coefficient of 1.46, which means trading in the stock is more volatile than its peers on the stock exchange.

What analysts think: Analysts appeared concerned about the financial services landscape and the prospects of Aeon Credit. Kenanga Research, which has a “market perform” rating on the stock said in a Dec 23 report: “We expect Aeon Credit’s financing receivable growth to taper, mirroring the slowdown in domestic consumption post-goods and services tax implementation and the challenging economic conditions with consumers likely to rein in their spending.”

The research house also said that the company’s non-performing loan (NPL) ratio is likely to hover between 2.5% and 3% given that the current economic conditions have not changed and should remain status quo over the near term.

“Similar to sector-wide headwinds, Aeon Credit is poised to see narrowing nett interest margins due to lower rates to support financing growth,” it added.

The company management told RHB Research that it expects to end-financial year 2016 (FY16) with receivables growth between high-teens and 20%, while for FY17, growth is expected to moderate to 15% to 20%, partly due to a larger base effect.

The NIM, however, is expected to remain under pressure due to the continued shift in product mix to car and motorcycle financing, as well as the focus on lower credit risk customers. “Finally, on asset quality, Aeon Credit was hopeful NPLs would be stable in the fourth quarter of financial year 2016, aided by the BR1M payout,” RHB Research said in a research note dated Dec 23.

“The macroeconomic environment is headed for a softer patch, and this may see asset quality of financial institutions come under pressure,” it added. The research house maintained its “neutral” stance on the stock.

Analyst-calls-on-Aeon-Credit-Service-(M)-Bhd-050116-01AllianceDBS was similarly wary of the financial environment and maintained its “hold” rating on the stock. “We maintained our loan growth assumption at 18% in FY16 (moderating from 27% in FY15) as we continue to expect the operating environment to remain challenging amid weaker consumer sentiment. While no further details were given on the uptick in gross NPL ratio, we continue to be watchful on Aeon Credit’s asset quality,” it said.

Earnings forecast:

Aeon-Credit-Service-(M)-Bhd-earnings-forecast-050116-01

StockStalk: If analysts are to be believed, the outlook doesn’t seem very promising for Aeon Credit, given that softer consumer spending is expected to persist and economic conditions expected to be equally bleak going forward.

We agree with the analysts to some extent, but this should not be a reason to shun the stock as we note that the company’s share price has been performing despite these conditions. It might not be great, but then again, the sector as a whole has been rather lacklustre of late.

Perhaps investors may want to wait until the release of the company’s full-year results before they make any snap judgement about whether to buy or sell. By then, they would have a better indication of how the company is going to perform for the full-year 2016 and thus have more information before making any investment decision. Exercise caution, we say, but don’t discount the possibilities.

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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.

 



 
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