Summary

• ELK-Desa Resources Bhd’s (ELK) core net profit plummeted 56.9% YoY to RM4.6m attributed to lower contribution from both hire purchase and furniture segments amid Movement Control Order (MCO) declared by the Government from June 2021 onwards. Revenue for the quarter declined 37.5% YoY to RM23.4m. An interim dividend of 2.0 sen per share, payable on 16th December 2021 was declared.

• YTD, ELK’s core net profit fell 26.8% YoY to RM9.6m, due to lower hire purchase portfolio, but was partly cushioned by lower impairment allowance, staff costs and finance cost. QoQ, ELK’s core net profit dropped 5.8% to RM4.6m was due to the MCO3.0 being imposed but was partly offset by the continued effort to improve operational efficiencies and optimise operating cost.

• The results came in below expectations and it missed our full year consensus of RM43.2m. Key deviations were mainly due to the disruptions from the full lockdown that affected ELK’s customers’ ability to fulfil loan obligation as well as logistics for the furniture business. The hire purchase segment saw smaller hire purchase portfolio and no hire purchase disbursement during the quarter, coupled with higher impairment allowance that increased 95.0% YoY to RM5.4m. Meanwhile, lower furniture sales led to loss before tax for the furniture segment.

• ELK maintained a cautious stance by paring down its debt through repayment of block discounting facilities and term loans and fully redeem of MTN. As at 2Q22, the group’s gearing remained at a manageable level at 0.34 times.

• ELK’s hire purchase receivables declined 12.9% YoY to RM469.9m. Meanwhile, impairment allowance and credit loss charge (i.e. impairment allowance over average net hire purchase receivables) increased by 95.0% to RM5.4m and from 0.47% to 1.01% respectively, mainly due to the increase in non-performing accounts.

• Nevertheless, we believe the operating landscape should improve in the mid to long term on the back of high adult vaccination rate hitting over 95%, economic stimulus packages and recovery initiatives announced in Budget 2022 as well as reopening of business activities. Note that Malaysia’s new vehicle sales jumped 43.4% to 63,489 units in October which is higher than the monthly average sales in 2019, indicating brighter prospect for the underserved used car market which bodes well for ELK.

Valuation & Recommendation

• Given the reported earnings came below our expectations, we slashed our FY22f and FY23f forecasted earnings by 15.5% and 17.1% to RM31.6m and RM35.8m respectively, in view of the increase in non-performing accounts.

• Nevertheless, we retained our BUY recommendation on ELK, with a lower target price of RM1.51 (from RM1.52). Our target price is derived by ascribing a P/B of 0.95x to FY23f book value per share of RM1.58. Meanwhile, ELK remains committed to delivering its dividend policy of distributing not less than 60.0% of its net profit after tax.

• Downside risks to our recommendation include uncertainties in the macro economic factors amid post-Covid recovery such as unemployment rate and inflation, which may eventually hamper ELK’s customers’ ability to fulfil loan obligation. Meanwhile, logistics remain an issue for the furniture segment.

Source: Mplus Research - 19 Nov 2021