AEON Credit Service $AEONCR (5139.MY)$ reported weaker-than-expected earnings for the first half of FY25, largely due to higher credit costs. The company posted a net profit of RM71.2 million in the second quarter, representing a sharp 38% year-on-year decline, and 33% lower than the previous quarter. The total net profit for 1HFY25 reached RM177.6 million, a 17% decrease compared to the same period last year. However, the market reacted positively to the company's announcement of a higher dividend payout ratio of 41%, its highest in over two years, which has reassured investors despite the earnings miss.
RHB Stock Broking House maintained a BUY call on AEON Credit, with a target price of RM8.80, offering a potential 20% upside. The higher dividend, despite missed earnings, signals confidence in the company's long-term financial health. Analysts believe the group's multiple growth drivers, such as its increasing gross financing receivables, offer further potential, and its current valuation remains attractive. Despite the rise in credit costs, the group's management remains on track to meet its target return on equity (ROE) of around 13%, even accounting for losses incurred from its digital banking operations.
In the second quarter, AEON Credit's net interest income (NII) grew by 15% year-on-year, while operating expenses rose by 20%, driven by higher personnel and marketing costs. The company's gross financing receivables rose 14% year-on-year to RM13.2 billion as of August 2024, with significant growth in personal and automobile financing. Personal financing grew by 19% year-on-year, and automobile financing surged 21% year-on-year, reflecting continued strength in the group's core lending business.
Credit costs spiked in the second quarter to 4.4%, up from 3.2% in the first quarter and 2.6% in the same period last year, which impacted the overall profitability. However, non-performing loans (NPL) remained steady, with a slight decrease in the NPL ratio to 2.4%, down from 3.0% in 2QFY24. AEON Credit's loan loss coverage ratio improved to 229%, providing a stronger cushion against any future asset quality risks.
The company is expected to continue expanding its financing receivables, particularly in the personal and automobile financing segments. Management's 10% growth target for the year is seen as conservative, and analysts predict the group will likely exceed this target, especially following the expected salary revisions for civil servants in December 2024.
