AEON CREDIT SERVICE (M) BHD

By MIDF Research Buy (Maintain) RM14.75

Target price: AEON Credit announced that it has been served with notices of additional assessment and penalties totalling RM96.8 mil from the Inland Revenue Board (IRB).

This amount accounted for the additional tax bill, which goes back seven years to the assessment year in 2010.

The substantial amount claimed by IRB is comprised of RM66.8 mil of additional tax and RM30mil worth of penalty.

Following this development, management has appointed tax solicitors to take legal actions, in order to challenge the validity and legality of this notice.

Based on previous cases, MIDF Research understands that the proceedings will take at least months to conclude where the earliest period for case settlement was three months.

“Hence, we expect that there would be no immediate impact to the company’s earnings at least in the near term of financial year 2018 (FY18).

“While there is possibility that the outcome may conclude in the group’s favour, we do not rule out the risks of payment by the full amount borne by Aeon Credit,” said MIDF Research.

The research house’s situational analysis showed that, assuming that a lump sum payment was to take place, earliest in FY19, the company would likely see a contraction in its net earnings by approximately 30%.

Given that MIDF Research’s valuation is based on the company’s book value, the earnings contraction will drive down the FY19 book value per share (BVPS) from RM5.30 to RM4.90.

“Hence, we estimate that it would result in a fair value decrease of 7% to RM13.72, which would constitute a neutral call.

“However, at this juncture, we are maintaining our FY18 and FY19 earnings, given that the length of the legal process and pending further information of the timeline of the proceeding,” said MIDF Research.

The research house continues to be optimistic on the outlook on the group’s business based on its value chain transformation journey.

It added that this new development might pose a blip in Aeon Credit’s future earnings but does not detract from its earnings potential.

Future re-rating catalyst would be the outcome of the proceedings and higher-than-expected future earnings (FY19 onwards).