• ELK-Desa Resources Bhd (ELK) is a reputable hire purchase financier backed by over 1,000 extensive dealers’ network in the underserved niche used motor vehicle industry, registering 11.5% CAGR in HP receivables between FY17-21.

• Capitalising on low gearing, ELK is in a position to expand hirers’ base by tapping into the debt capital market as soon as the crisis is over, while exercising prudence execution to preserve the asset quality and achieve steady growth.

• We initiate coverage on ELK with a BUY call and fair value of RM1.52, based on 0.95x P/B pegged to its forward FY23f book value per share of RM1.60.

Investment Highlights

• Reputable hire purchase financier in niche market. We like ELK’s position as (i) a prudent hire purchase financier focused on the niche used car market, (ii) it has more than 17 years’ experience in the competitive industry and (iii) its extensive dealer network comprised of more than 1,000 dealers. Meanwhile, a report by Ken Research suggested that the Malaysian used cars market is anticipated to witness a CAGR of 2.1% during 2020-2025 in terms of number of used cars sold.

• Strong growth in hire purchase receivables. ELK registered a CAGR of 11.5% on hire purchase receivables in FY17-21 with a healthy asset quality. Non-performing loan (NPL) ratio has been declining over the past years and became on par with the financial institution in FY19. The NPL ratio has declined in 1QFY22 after a spike in FY20-21 due to Covid-19 pandemic.

• Ample potential to leverage up. ELK’s gearing at 0.44 in FY21 was significantly lower than that of the peers’ average at 3.12, implying its relatively successful efforts in debt level management. The low gearing ratio gives it ample potential to leverage up and expand its hire purchase business.

• More than 17 years of experience in the hire purchasing industry. ELK is a non bank financial institution founded in 2004, principally involved in the provision of hire purchase solutions for used car motor vehicles. The group made its debut on the Main board of Bursa Malaysia Securities Bhd in 2012, and subsequently ventured into furniture business in July 2015. ELK operates its hire purchase and furniture divisions via ELK-Desa Capital Sdn Bhd and ELK-Desa Furniture Sdn Bhd respectively.

• Expanding car dealers’ network with focus in Klang Valley. ELK expands its hire purchase business primarily through referral from its extensive dealers’ network. Over the years, the group has widened its network of motor vehicle dealers of over 1,000 in 2021. Meanwhile, Klang Valley remains as its main targeting area as Selangor and Kuala Lumpur accounted the largest market share in terms of used car sales volume.

• Business strategies focused on business sustainability… ELK embedded a prudent approach in the selection of used vehicle to ensure better asset quality over quantity, this has allowed the group to lower its non-performing loan (NPL) ratio over years prior to the pandemic.

• …with a solid dividend policy. Meanwhile, the group is committed to deliver its dividend policy of distributing not less than 60.0% of the group’s annual net profits.

• Ventured into furniture division. ELK ventured into the furniture business in July 2015. In FY16-21, the group has successfully expanded its distributing network from more than 300 to over 800 furniture retail outlets. The hire purchase business, however remains as its core, representing over 90% of earnings in FY17-21.

Source: Mplus Research - 26 Oct 2021