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12 things to know about Aeon Credit Service before you invest

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Listed in 2007, Aeon Credit Service (M) Berhad
offers a diverse range of financing services for the purchase of motor vehicles
and consumer durables in Malaysia. Presently, it operates out of six regional
offices and has a network of 71 branches and service centres in shopping malls
across Malaysia. As at 15 July 2019, Aeon Credit is worth RM4.2 billion in
market capitalisation.

In this article, I’ll bring an update on the
company’s latest financial results, long-term performance, and valuation. So here
are 12 things to know about Aeon Credit before you invest:

1. For the financial year ended 28 Feb 2019, Aeon Credit had gross financial receivables of RM8.7 billion. This comprised mainly of automobile financing, motorcycle financing, and personal financing:

Segment Amount (RM millions) Percentage of Total
Motorcycle Financing 2,568 29.5%
Automobile Financing 2,509 28.9%
Personal Financing 2,449 28.2%
Credit Card 762 8.8%
Objective Financing 339 3.9%
SME Financing 65 0.7%
Total 8,692 100.0%

Source: Aeon Credit Q4 2019 results

Inclusive of impairment losses, Aeon Credit’s total financing receivables amounts to RM8.1 billion. This amount has grown at a compound annual growth rate (CAGR) of 25.0% from RM873 million in FY2009. This is mainly attributable to growth from its key segments: automobile, motorcycle, and personal financing over the last 10 years.

Source: Aeon Credit annual reports

2. Aeon Credit’s non-performing loans rose sharply from 1.73% in 2013 to 2.64% in 2015. This was due to the company relaxing its lending policies to capture more market share during the period. Since then, Aeon Credit has tightened its policies and its NPL ratio has steadily dropped to 2.04% in 2019.

Source: Aeon Credit annual reports

3. Aeon Credit had a stable collection ratio of 97.97% in 2019. For receivables past due 1 month and past due 2-3 months, the collection ratio was 82.58%, and 71.24% respectively. The collection ratios are fairly consistent compared to the levels recorded over the past three years.

Source: Aeon Credit Q4 2019 results

4. Over the last 10 years, Aeon Credit has achieved a 22.0% CAGR in both revenue and shareholders’ earnings. This was mainly due to steady growth in interest income and fees received from provision of automobile, motorcycle, and personal financing during the period.

Source: Aeon Credit annual reports

5. From 2012 to 2017, Aeon Credit had a six-year return on equity (ROE) average of 30.0%. In 2018, the company substantially enlarged its equity base due to a rights issue of 432 million irredeemable convertible unsecured loan stocks, which caused its ROE to fall to 19.0%. In 2019, Aeon Credit’s ROE rebounded to 23.7% as the company continued to grow its profits.

6. As of 28 February 2019, Aeon Credit had a debt-to-equity ratio of 3.38, an increase from 2018 but substantially lower compared to levels recorded from 2013 to 2017. The ratio fell significantly in 2018 due to the aforementioned rights issue.

Aeon Credit also has a healthy total capital ratio (TCR) of 22.4%. In comparison, Malaysian banks have an average TCR of 17.46%.

Source: Aeon Credit annual reports

7. Aeon Credit aims to increase its pool of borrowers in the Middle-40 (M40) income group. The M40 group refers to a target group where median household incomes range from RM3,860 to RM8,319 a month, and are considered higher-quality borrowers than the B40 group of customers. The company’s focus on the M40 group has allowed it to bring down its NPL ratio since 2015. Moving on, Aeon Credit plans to offer customised products such as platinum cards, risk-based pricing products, and the AEON E-wallet to this group of customers.

Source: Aeon Credit Q4 2019 results

8. In November 2018, Aeon Credit successfully launched AEON E-wallet. It can be used by all Aeon members to perform cashless transactions at all Aeon retail outlets across Malaysia. As of 28 February 2019, Aeon Credit has over 150,000 e-wallet users and aims to reach one million users in FY2020.

Source: Aeon Credit Q4 2019 results

9. Aeon Credit was granted a money-lending license by the Malaysian Government which is valid for two years starting 15 January 2019. Money-lending complements Aeon Credit’s existing financing business and will open up a new revenue stream as it allows the company to market its services to wider pool of customers.

10. P/E ratio: Aeon Credit reported earnings per share of RM1.336 in FY2019. Based on its share price of RM16.70 (as at 15 July 2019), Aeon Credit’s P/E ratio is 12.5, above its 10-year average of 10.97.

While its P/E ratio may look to be on the high side, the company has been growing its earnings at 22.0% on average over the last 10 years. This means Aeon Credit’s PEG ratio is currently 0.57 which is considered unvalued when you take into account the company’s growth rate. However, it may be more conservative to use Aeon Credit’s more recent growth rates as a company’s growth usually slows as it becomes larger. From 2016 to 2019, Aeon Credit’s earnings CAGR was 15.9% — which gives us a more conservative PEG ratio of 0.78.

11. P/B ratio: As of 28 February 2019, Aeon Credit has net assets per share of RM5.87. Hence, it has a current P/B ratio of 2.84, which is below its 10-year average of 2.95.

12. Dividend yield: Aeon Credit has a track record of paying increasing dividends over the last 10 years. Its adjusted dividend per share has increased from 8.20 sen in 2010 to 44.60 sen in 2019 (adjusted for the rights issue in FY2018).

Source: Aeon Credit annual reports

If Aeon Credit maintains its dividend, its current yield is 2.67% which is below its 10-year average of 3.20%.

The fifth perspective

Aeon Credit has delivered consistent growth in revenues, earnings and dividends over the past 10 years. As such, its share price has risen substantially and its market capitalisation has grown from RM350 million in 2009 to RM4.2 billion today.

The stock currently looks expensive based on historical averages, but if the company is able to sustain its growth rate for a number of years, the stock may be worth its premium today. Whether you believe this growth will pan out or not depends on your independent views and research as an investor.

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