Aeon Credit Service (M) Berhad (Aeon Credit) missed market expectation in the latest financial period due to higher credit cost and loss incurred by Aeon Bank, nevertheless, the maturation of AEON Living Zone and digital banking are set to beef up its long-term Return on Equity (ROE).

The net profit for the six-month period ended 31 August, 2024 (1HFY2024/25) for Aeon Credit was below expectation due to unexpected blows to credit cost in spite of new asset quality measures being implemented.

Analysts cut their FY2024/25 and FY2025/26 earning forecasts by 16% and 2%, respectively.

Aeon Credit's 1HFY2024/25 net profit of RM177.6m, marking a decrease of 19% year-on-year, making up just 42% of analysts' full-year forecast and 41% of consensus full-year estimate due to higher-than-expected impairment in 2QFY2024/25, as Non-performing Loan (NPL) ratio continued to narrow.

Higher impairment allowances (gross credit cost at 5.62%, +74 bps) on higher provisions from key motor and personal financing segments, in addition to further associate losses incurred by Aeon Bank, caused the six-month net profit to decline by 19%.

The credit service provider's long-term ROEs (~15%) may see further momentum given the maturation of its AEON Living Zone and digital banking efforts. A results briefing will be held today (27 September) where more details on the provisions are expected.

With regards to growth strategies, wider engagement from AEON Living Zone offers cross selling opportunities on its captive customer base while also providing a smooth introduction of AEON Bank to the market. However, these channels are expected to carry heavier customer
acquisition costs and hence will only likely contribute significantly to earnings in the medium-term once better scale is reached.

In summary, analysts maintain their OUTPERFORM call and a target price of RM8.35 for Aeon Credit.

As at 1:13am Friday, Aeon Credit's stock traded at RM7.11. (Stock updates from )