AEON - BUY - 22 Aug 2008

AEON Credit Service - Rising cost pressures for consumers presents opportunity (Company Update)



Price: RM3.22

Target Price: RM4.00

Recommendation: BUY



· AEON Credit Services (M) Berhad (ACSM) is likely to benefit from consumers seeking alternative sources of funding to sustain their lifestyles in response to higher food, fuel and energy costs. The firm has already seen a 33% spike in Motorcycle Easy Payments (MEP) in the month following the petrol price hike in June 2008. Demand for General Easy Payments (GEP) is also expected to pick up with the approach of the Hari Raya festive season.

· Leveraging on relationship with AEON Co. for outlet expansion and launch of the J Card store cum credit card. ACSM will be riding on AEON Co.'s expansion plan that targets 30 department stores by 2013 from 18 now to widen its distribution network and expand customer base. Further, the introduction of the J Card credit card expected by end-FY09 will help ACSM raise its current cardholder base of approximately 117,000 to its target 190,000. Other new products in the pipeline such as prepaid cards and new co-brand cards will contribute to the credit card division breaking even by FY2010.

· Civil servants salary deduction business expected to kick-off at end-FY09, at the earliest. ACSM is currently in talks with the co-operative body administering the scheme and several other co-operatives in its bid to provide consumer financing for civil servants under the direct salary deduction program. The co-operative credit business is appealing to ACSM for its growth potential (1HCY08 collection rose by 27% YoY), cross-selling opportunity and lower risk profile.

· ACSM's venture into India signals potential for further regional expansion. AEON Credit Japan's selection of ACSM to spearhead its foray into India based on its multi-cultural experience in Malaysia is a positive sign although the extent of the earnings contribution from the venture remains uncertain. Nonetheless, we expect ACSM to be at the forefront of any group expansion into ASEAN.

· Re-iterate BUY recommendation with target price of RM4.00. based on 11x PER applied to revised FY09 EPS of 36.0 sen. The biggest risk to our forecast is a general slowdown in consumer spending although we believe that ACSM will prove resilient given its strong operational capability, lower risk profile with loans for small ticket items, and new growth areas.