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Saturday, March 25, 2017

AEON Credit Service (M) - Proposing Bonus and ICULSaeon

Author: kiasutrader | Publish date: Fri, 24 Mar 2017, 09:18 AM

AEONCR has proposed a 1-for-2 bonus issue as well as rights issuance of 432.0m ICULS on the basis of 2 ICULS for every 1 share held. The bonus issue will address the liquidity issue while the RM432.0m gross proceeds will come in handy to help the group build an adequate level of capital buffer and to support continuous business growth. We maintain our FY17E/FY18E earnings for now. Maintain OP with an unchanged TP of RM17.76.

1-for-2 bonus issue to reward shareholders and to improve liquidity. In a BURSA announcement yesterday, the group proposed for a 1-for-2 bonus issue that will involve the issuance of 72.0m bonus shares; with existing 144.0m AEONCR share capital to be increased to 216.0m shares. Note that the bonus issue will be completed in a single issuance and is expected to be completed during the 3Q17. We laud the move as the proposed Bonus issuance will address the share liquidity issue that has been plaguing the group for years. This will also reward its loyal investors as well as facilitating possible equity-linked fundraising exercises in the future through a larger share capital base.

Cash call to raise RM432.0m via renounceable rights issue. In the same announcement, the group has also proposed renounceable rights issue of 432.0m ICULS, with 3-year minimum 3.5% ICULS on the basis of 2 ICULS for every 1 existing AEONCR share held. Based on the terms of the ICULS, the ICULS holders can convert their ICULS anytime from and including the date of issuance of the ICULS. The proposed renounceable rights will raise RM432.0m cash (100% of its RM1.00 nominal value) that will be used to: (i) improve its capital adequacy ratio (CAR) that will facilitate the build-up of an adequate level of capital buffer and to support continuous business growth, (ii) improves the group’s liquidity and financial flexibility by strengthening its financial position as well as (iii) providing the shareholders the opportunity to participate in an equity offering on an equal basis without diluting their interests upon conversion of the ICULS (with an assumption on all portions fully subscribed respectively). For illustrative purposes, assuming full conversion of ICULS, the CAR will be improved to 28.1%. Due to the timeframe to implement the proposed rights issue and the potential share price movement of the AEONCR during this period, the conversion price for the ICULS has not been fixed.

Still shining despite macroeconomic headwinds. In terms of group’s prospect, loan demand from AEONCR’s targeted customers - retail market is, in fact, still resilient thanks to its niche market exposure, vis-à-vis most of the financial services providers that are facing tougher times in growing their loan portfolios amid current economic condition. We are keeping our gross financing receivables growth assumption rates of c.9% for FY17-FY18. Besides its healthy loan growth, we also like its: (i) decent asset quality with NPL expected to hover between 2-3% (on seasonality), healthy CAR, which is expected to be at a comfortable 20% vs BNM’s CAR requirement of 16%, (iii) higher ROE of >20% in FY17E-FY18E as well as decent dividend yields of 4-5% (based on DPR of 38%); which are better than other NBFIs as well as most of the banking stocks.

Maintain OUTPERFORM with an unchanged TP of RM17.76. We made no changes to our earnings estimate given the still early stages of the proposed exercises. Our TP remained unchanged at RM17.76 based on an unchanged targeted 10.0x FY18E PER. Risks to our call include: (i) steeper margin squeeze, (ii) slowerthan-expected financing receivable growth, and (iii) worse-thanexpected deterioration in asset quality. For illustrative purposes, however, post the proposed bonus issue and assuming full conversion of ICULS, the enlarged share capital all in will be 264.5m from 144.0m which leads to our ex-TP of RM9.67. (**please refer to the overleaf for the group’s illustrated calculation)

Source: Kenanga Research - 24 Mar 2017

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