KUALA LUMPUR: Kenanga Investment Bank Bhd (Kenanga Research) has cut its earnings forecasts for Aeon Credit Service (M) Bhd by 16 per cent and four per cent for financial year 2025 (FY25) and FY26, respectively, due to elevated credit costs.
In a note, the research firm raised its gross credit cost assumptions to 5.5 per cent and 4.75 per cent for FY25 and FY26 from 5 per cent and 4.25 per cent respectively, in anticipation of further business as usual (BAU) provisions by Aeon Credit with fewer writebacks.
It added that Aeon Credit's efforts to tighten its asset quality via more comprehensive credit assessments, analytics, and recovery efforts could narrow its non-performing loan ratio, albeit at the cost of more top-ups to provisions along the way.
In the first nine months (9MFY25), Aeon Credit posted a net profit of RM359.6 million and made up 67 per cent of Kenanga Research's and 59 per cent of consensus' full-year forecasts.
"The negative deviation was driven by higher-than-expected impairments, of which we await clarity on its nature in today's results briefing.
"We suspect this is attributed to the group's quicker onboarding of new customers, which temporarily inflates its staging needs. That said, we note that its NPL ratio still showed an improvement at 2.42 per cent, thanks to its larger receivables book," it said.
On a year-on-year basis, Aeon Credit's total income in 9MFY25 grew by 14 per cent on the back of higher net interest income supported by a larger financing book and stronger overall fees as well as recoveries.
However, net earnings declined by 22 per cent, due to higher overall provisions with a gross credit cost of 5.89 per cent absent writebacks in 9MFY24.
Net credit cost for the period was 4.24 per cent with loan loss coverage sitting at 231 per cent, edging close to the group's comfortable level of above 230%.
"We note that this is the second consecutive surprise on provisions, with its loss given default model updates now expected to be more recurring in nature, which could further dampen earnings visibility in the short run. Meanwhile, more investments and customer acquisition costs are required in the near term to fuel its "AEON Living Zone" ecosystem to boost cross-selling opportunities.
"We take solace that Aeon Bank's losses remain well contained and within the expected run rate of RM60 million per year until it begins to generate revenue," it said.
Kenanga Research maintained its 'Outperform' call on the stock with a lower target price of RM7.