Aeon Thana Sinsap Thailand: FY25F pressured by portfolio contraction
- 4QFY25F (Dec 2024-Feb 2025) earnings estimated at THB729mn (-33.3% y/y; -7.6% q/q), taking FY25F (end-Feb 2025) earnings to THB2.9bn (-12.1% y/y)
- Loans to further contract due to ongoing NPL write-offs and a conservative lending approach
- NPL ratio to decline on loan restructuring, while credit cost expected to decrease further
- Maintain HOLD with a TP of THB130
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For 4Q25F, the y/y decrease should be attributed to (i) higher expected credit loss (ECL) (+34.5% y/y), (ii) lower interest income (-3.1% y/y) due to loan portfolio contraction (-2.2% y/y), and (iii) higher interest expenses (+6.7% y/y) from higher cost of funds, despite lower funding base.
Meanwhile, the q/q decline should also be attributed to (i) lower interest income (-2.0% q/q), (ii) lower other income (-12.3% q/q) due to the THB94mn gain on sale of investment in subsidiary, i.e., AEON Microfinance (Myanmar), booked in 3QFY25, and (iii) higher effective tax rate.
For FY25F (end-Feb 2025), the decline in earnings should be due to (i) higher ECL (+5.3% y/y, mainly for loan write-offs), (ii) lower interest income (-2.0% y/y, from loan and net interest margin [NIM] contraction), and (iii) higher interest expenses (+6.5% y/y, from higher cost of funds, despite lower funding base).
Loans to further contract due to ongoing NPL write-offs and a conservative lending approach. We expect AEONTS’s credit card and personal loan portfolios to further contract in 4QFY25F due to (i) its ongoing NPL write-offs, (ii) its continued focus on low-risk customer groups that have high spending power and a high ability to repay debt – note that these customers typically repay their loans in full, i.e., paying no interest, and (iii) the increase in the minimum credit card payment to 8% from 5% since 1 Jan 2024.
Nonetheless, we believe its hire purchase (HP) loans will continue to increase. Note that in Thailand, other than used-car HP, AEONTS also offers HP loans for environment-friendly products, such as electric motorcycles and solar cells, while offering HP for electrical appliances, mobile phones, etc. in overseas markets. In addition, it offers vehicle title loans, i.e., “AEON Auto Quick Cash”, for its current customers, focusing on inclusive credit access to support social sustainability.
Net-net, we estimate AEONTS’s loan outstanding at end-4QFY25F at THB89bn (-2.2% y/y; -0.5% q/q).
NIM to decline on loan contraction and rising cost of funds. With AEONTS’s loan portfolio shifting towards HP loans (at the expense of credit card loans), with the proportion of personal loans remaining relatively stable, we expect yield to continue to increase y/y in 4QFY25F. Nonetheless, we anticipate its interest income to decline due to loan contraction.
Meanwhile, despite the decline in its funding base amid slow lending growth and high cash inflow from credit card loan repayments, we estimate its interest expenses to increase y/y due to debt repricing at higher interest rates.
Net-net, we believe NIM is likely to decline y/y and q/q for both 4QFY25F and FY25F.
Other income to increase y/y on better bad debt recovery. AEONTS’s other income comprises income from bad debt recovery, income from NPL sales, collection service fee income, insurance commission fee income, and others.
We estimate other income to increase 4.4% y/y but decline 12.3% q/q to THB836mn in 4QFY25F. The y/y increase should be thanks mainly to higher income from bad debt recovery. Meanwhile, the q/q decline should be due to the THB94mn gain on sale of investment in subsidiary recorded in 3QFY25, despite higher income from bad debt recovery expected in 4QFY25F.
Note that there were no NPL sales in 4QFY25F, 4QFY24, and 3QFY25.
For FY25F, we expect other income to increase 15.0% y/y, thanks to higher income from bad debt recovery and the gain on sale of investment in subsidiary booked in 3QFY25.
Cost-to-income ratio to improve in 4QFY25F. We expect its operating expenses (OPEX) to decline 6.8% y/y and 7.1% q/q in 4QFY25F and cost-to-income (C/I) ratio to improve to 43.0% in 4QFY25F (vs. 44.8% in 4QFY24 and 44.4% in 3QFY25), following the company’s operating cost management policy amid slow business volume and increased cost efficiency through digitalisation.
For FY25F, however, we expect OPEX to increase 1.7% y/y, due to its business expansion in Cambodia and a THB40-50mn one-off expense relating to an IT vendor and an outsource collection company in 1QFY25. Meanwhile, C/I ratio is expected to increase to 43.2% in FY25F (vs. 42.4% in FY24).
NPL ratio to decline on loan restructuring, while credit cost to continue tapering down. Following the company’s NPL management, active loan restructuring, and proactive customer assistance policy, we expect its NPL ratio to decline to 5.7% in 4QFY25F (vs. 5.9% in 3QFY25).
Meanwhile, we believe its credit cost already peaked at 9.1% in 1QFY25 and expect it to continue tapering down. Despite the company’s ongoing NPL write-offs in 4QFY25F, its credit cost should decline from 3QFY25, as those NPLs should have largely already be covered by ECL. We estimate its credit cost at 7.8% in 4QFY25F (vs. 8.0% in 3QFY25) and 8.4% in FY25F (vs. 7.8% in FY24).
We expect to see a lower credit cost in FY26F, given that the company plans to revisit its ECL model assumptions (with positive adjustments expected) in Feb 2025, leading to potentially lower ECL in FY26F.
Expect a stronger FY26F. With its cleaner balance sheet, AEONTS aims to expand its loan portfolio to expand again in FY26F. We currently assume AEONTS’s loan growth of 3% (vs. a 2.2% contraction in FY25F), NIM of 17.4% (down from 17.8% in FY25F), C/I ratio of 43.0% (down from 43.2% in FY25F), and credit cost of 7.6% (down from 8.4% in FY25F). With that, we estimate AEONTS’s earnings to increase 12.7% y/y in FY26F (vs. a 12.1% y/y decline in FY25F).
Maintain HOLD with a TP of THB130. Our TP is based on 1.2x FY26F (end-Feb) P/BV, i.e., 1.5SD below its 5-year average P/BV. While we believe AEONTS is well equipped to bounce back and rerate with the economic recovery, we estimate its FY25F earnings would reduce 12.1% y/y due to loan contraction and higher credit cost. With that, our HOLD rating stands. Clearer signs of improving asset quality may prompt us to review our recommendation.
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