Summary

• ELK-Desa Resources Bhd’s (ELK) 3Q22 core net profit rose 14.0% YoY to RM10.3m. Key drivers include (i) higher revenue contribution from the furniture segment, (ii) lower impairment allowance, and (iii) lower finance cost. QoQ, ELK reported a 122.6% jump in core net profit, mainly due to higher profit contributed from both hire purchase and furniture segments.

• 9M22 results, however, fell 10.1% YoY to RM22.2m, mainly due to the lower contribution from the furniture segment caused by the implementation of MCO from June to September 2021, as no delivery of goods could be made during the period. Although the results only accounted to 63.0% of our full year forecast of RM31.6m, we deemed the net profit largely in line as we believe 4Q22 will gain more traction with the reopening of business activities.

• The hire purchase segment saw its revenue decreased by 3.0% YoY due to a smaller hire purchase portfolio. However, the bottom line was cushioned by lower impairment cost resulted from the decrease in non-performing accounts, as well as lower finance cost on lower borrowings. The furniture segment, conversely, saw top line growth YoY, mainly lifted by higher domestic sales.

• ELK’s gearing fell further to 0.30 from 0.49 in a year ago as the group continued to pare down its debt via repayment of block discounting facilities and term loans. Meanwhile, ELK’s cautious stance to preserve asset quality was reflected in the lower hire purchase receivables recorded at RM469.3m, representing a 10.0% decrease from the previous corresponding quarter.

• We believe the operating outlook is gradually turning brighter for the hire purchase segment, as the impairment allowance in 9M22 decreased 22.0% to RM15.6m as compared to 9M21, leading to a drop in credit loss charge to 2.9% from 3.4%. This was due to the hirers’ continuous repayment trend during the period.

• Malaysia’s averaged new vehicles sales from September to December 2021 grew 172.2% to 65,184 from the previous quarter, indicating a recovery in demand for used car market. For the furniture segment, we believe demand for quality furniture products should remain resilient as people embracing the new normal hybrid working lifestyle.

Valuation & Recommendation

• As the earnings were in line with our expectations, we remained the forecasted earnings for FY22f and FY23f unchanged at RM31.6m and RM35.8m respectively in view of the encouraging overall outlook.

• We retained our BUY recommendation on ELK, with an unchanged target price at RM1.51. The target price is a derived by ascribing a P/B of 0.95x to FY23f book value per share of RM1.58. Meanwhile, ELK remains committed to the distribution of not less than 60.0% of its net profit after tax.

• Downside risks to our recommendation include credit risk as the hirers’ ability to fulfil their loan obligations may potentially be impacted by the recent resurgence of Covid-19 cases as well as the unexpected floods in Kuala Lumpur and Selangor. Besides, raw material supply for the furniture segment could be disrupted by logistic problems, while labour shortage could be another key risk.

Source: Mplus Research - 21 Feb 2022