AEON Credit Service (M) - On the up and up

AEON Credit Service (M) - On the up and up (Company Update)

Price: RM3.91
Target Price: RM4.35
Recommendation: BUY

· AEON Credit Service’s (ACSM) upcoming 1HFY10 results (to be announced on 17 September) is expected to register double-digit net profit growth YoY. This will be sustainable through FY10 as consumer sentiment improves (demonstrated by MIER’s Consumer Sentiment Index in 2QCY09 that is up by 35 pts YoY).

· Expect FY10 net profit growth forecast of 25% to be met underpinned by steady demand for easy payment schemes and significant growth in the credit card division. Stronger earnings are expected in 2HFY10 in-line with seasonality (Hari Raya and year-end festivities) and AEON card booster.

· Joint AEON credit card and loyalty J-Card biggest growth catalyst for credit card division. The co-brand card that was launched in August 2009 is expected to expand ACSM’s cardholder base by 38% to 180,000 by end-FY10 and result in break-even for the division.

· Easy payment schemes continue to be ACSM’s bread and butter accounting for more than 70% of group revenue in FY10. We anticipate double-digit sales growth for Motorcycle Easy Payment (MEP) in 1HFY10 and high single-digit sales growth for General Easy Payment (GEP) spite of lower sales growth compared with 1HFY09 due to exceptionally high demand for motorcycles in previous year with fuel price hike.

· Additional upside from alternative income streams. ACSM is seeing growth in its fee-based income as it promotes complementary insurance products more aggressively via cross-selling and telemarketing. ACSM is also deriving revenue from new sources such as used car financing (to be offered beyond Klang Valley to East Coast and East Malaysia) and loan collection agency (expected to begin operations in 4QFY10), that are likely to translate to material earnings growth in FY11.

· FY10 and FY11 net profit forecast unchanged. We have estimated FY10 net profit growth of 25% based on net receivables growth of 24% and FY11 net profit increase of 23% based on net receivables growth 22%.

· Raising target price to RM4.35 with rolling over to FY11 EPS of 62.2 sen and target PER of 7x (at 10% discount to regional average to account for lower trading liquidity). Our target price offers a potential upside of 11.3% and dividend yield of 4.3%. BUY.