Is Aeon Credit Service (M) Bhd A Stock For You?

Listed in 2007, Aeon Credit Service (M) Bhd (Aeon Credit) has established itself as a leading non-bank financial services provider in Malaysia. It provides a wide range of financing solutions such as easy payment schemes for the purchase of consumer durables, hires purchase schemes for the purchase of motorbikes and as well as personal financing schemes and issuance of credit cards in Malaysia.

As at 13 December 2018, Aeon Credit is trading at RM 15.34 a share. Question: ‘Is this a good time to invest in Aeon Credit?’

Source: Google Finance

Here, I’ll bring you an update on its latest financial results and would introduce a few valuation metrics to assess the investment potential of Aeon Credit. Here are 5 things to know about Aeon Credit before you invest.

#1: Portfolio Quality

As at 31 August 2018, Aeon Credit has reported having a portfolio of financing receivables of RM 7.25 billion, thus, continuing on its growth trend for the past 10 years. The expansion in its financing assets is crucial as Aeon Credit earns its main income from interest and financing income from them.

Source: Annual Reports & Q2 2019 Quarterly Report of Aeon Credit

Its growth is contributed from a double-digit increment in financing receivables from its provision of auto financing, motorbikes financing, credit cards issuance and personal financing. They have offset a fall in objective financing given in the 12-month period.

Figures in RM Million unless stated otherwise

Period	AutoFinancing	MotorbikeFinancing	CreditCards	PersonalFinancing	ObjectiveFinancing
Q2 2018	2,090	2,090	589	1,827	431
Q2 2019	2,243	2,345	663	2,095	386
Y-on-Y Difference	+12.5%	+12.2%	+11.2%	+14.7%	-10.5%

Source: Q2 2019 Results Update of Aeon Credit

Concurrently, Aeon Credit has improved its portfolio quality by improving its receivables collection. As a result, its non-performing loans were reduced to 2.07% in Q2 2019, down from 2.74% in Q1 2017.

Source: Q2 2019 Results Update of Aeon Credit

#2: Profitability

For the last 12 months, Aeon Credit has generated RM 1.28 billion in revenues and RM 351.8 million in shareholders’ earnings (RM 1.30 in earnings per share (EPS)). As at 31 August 2018, Aeon Credit has shareholders’ equity of RM 1.393 billion. Hence, Aeon Credit had made Return on Equity (ROE) of 25.27% a year, indicating that it generated RM 25.27 in annual earnings from every RM 100.00 in shareholders’ equity over the last 12 months.

Figures in RM ‘000 unless stated otherwise

Period	Q3 2018	Q4 2018	Q1 2019	Q2 2019	Total
Revenue	312,345	309,173	325,718	332,092	1,279,328
Earnings	85,079	86,873	99,235	80,640	351,827
EPS (Sen)	28.86	31.87	38.43	31.03	1.30

Source: Quarterly Reports of Aeon Credit

As such, Aeon Credit has maintained growth in profitability for the first half of 2019, continuing its growth trend for the last 10 years where its shareholders’ earnings had grown by CAGR of 22.4%, up from RM 48.8 million in 2009 to RM 300.1 million in 2018.

Source: Annual Reports of Aeon Credit

#3: Balance Sheet

As at 31 August 2018, Aeon Credit has reported capital adequacy ratio (CAR) of 21.95%. Hence, it indicates that Aeon Credit has a sufficient amount of capital to support continuous growth in business in the future.

Figures in %

Year	2015	2016	2017	2018	Q2 2019
CAR	21.4%	20.2%	19.5%	25.1%	22.0%

Source: Annual Reports & Q2 2019 Results Update of Aeon Credit

#4: Future Prospects

Here is a list of plans and events that would contribute to its future results:

Existing Network

As at 31 August 2018, Aeon Credit has expanded its number of branches to 66, merchant outlets to 12,000, and card members to 4.6 million. Aeon Credit will continue to leverage on its network expanded for sustainable growth in profits in the future.

Year	Branches & Service Centres	Merchant Outlets Network	Card Members
2015	50	> 9,000	> 3.0 million
2016	60	> 11,000	> 4.0 million
2017	64	> 12,000	> 4.0 million
2018	64	> 12,000	4.6 million
Q2 2019	66	> 12,000	4.6 million

Source: Annual Reports & Q2 2019 Results Update of Aeon Credit

Targeting the M40 Income Group in Malaysia

Aeon Credit has launched AEON Platinum Credit Card with attractive privileges, pilot test AEON Wallet (e-Wallet) and a new personal financing schemes for the middle-income group segment in Malaysia.

Updates on Material Litigation

On 12 December 2017, Aeon Credit was served with an additional assessment with penalties by the Inland Revenue Board (IRB) from 2010 to 2016 worth RM 96.82 million. Aeon Credit is appealing to dispute these additional assessments and currently, it is under judicial review.

Source: Q2 2019 Results Update of Aeon Credit

How significant is RM 96.82 million to Aeon Credit if they lost the appeal? Well, the amount is close to profits earned in a quarter or 27.5% of its earnings made over the past 12 months. Thus, in the least favourable condition, Aeon Credit is ‘more than capable’ to absorb these losses and make a quick recovery from it.

#5: Valuation

Based on its current stock price of RM 15.34 (13 December 2018),

P/E Ratio

In Point 2, Aeon Credit has made RM 1.30 in EPS over the last 12 months. Thus, its P/E Ratio is 11.80, slightly above its 10-Year Average of 10.46.

Key Statistics (13 December 2018):

10-Year P/E Ratio Range: 7.19 – 15.11

10-Year P/E Ratio Average: 10.46

Current P/E Ratio: 11.80

PEG Ratio

This is meant only for stocks that grow profits consistently.

In Point 2, I had calculated that Aeon Credit has achieved CAGR of 22.4% a year in shareholders’ earnings. Thus, if I divide its current P/E Ratio with its earnings growth rate of 22.4%, Aeon Credit has a PEG Ratio of 0.53, which indicates that it is undervalued as its PEG Ratio is below 1.0.

P/B Ratio

As at 31 August 2018, Aeon Credit has net assets a share of RM 5.58. Hence, its current P/B Ratio is 2.749, a little lower than its 10-Year Average of 2.83.

Key Statistics (13 December 2018):

10-Year P/B Ratio Range: 1.62 – 4.72

10-Year P/B Ratio Average: 2.83

Current P/B Ratio: 2.75

Dividend Yields

Over the last 12 months, Aeon Credit paid out 42.25 sen in dividends per share (DPS). It has a track record of growing dividends over the last 10 years. Thus, if Aeon Credit is able to at least maintain its DPS at 42.25 sen, its dividend yields, at minimum, is 2.75% per annum, below its 10-Year Average of 3.45% a year.

Key Statistics (13 December 2018):

10-Year Dividend Yield Range: 2.02% – 5.18%

10-Year Dividend Yield Average: 3.45%

Current Dividend Yield: 2.75%

VIA’s Verdict

Aeon Credit is a classic growth stock where it has proven itself to has achieved growth in sales, profits, assets, dividend payouts, and stock prices over the last 10 years. Over the short-term, Aeon Credit has kept its growth momentum and remains proactive in growing its portfolio of assets for the future.

So, should I buy Aeon Credit? The answer lies in which of the 4 valuation tools do you give more ‘weightage’ to. For instance, a dividend investor who intends to receive 5% and more dividend yields would not consider an investment into Aeon Credit. However, a growth investor who looks at both P/E Ratio and PEG Ratio may look into it if they opine that a P/E of 11.80 and PEG of 0.53 are fair and attractive.

Thus, it all depends on your individual investment objectives. They will decide what kind of stocks you should invest into.

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