Summary

• ELK-Desa Resources Bhd’s (ELK) 4Q22 core net profit plummeted 61.6% YoY to RM5.6m, bringing the FY22 net profit to RM25.5m (YoY: -30.5%). The results came in below our expectation, amounting to 80.7% of our full year forecast of RM31.6m. Key deviation was mainly due to the higher-than-expected impairment allowances. Meanwhile, a second interim dividend of 3.25 sen per share, payable on 16th Jun 2022 was declared.

• Core net profit plunged YoY, primarily resulted from (i) lower contribution from hire purchase segment due to smaller hire purchase portfolio and higher impairment allowance, as well as (ii) lower furniture sales. Those factors have led to a -46.3% decline in ELK’s core net profit QoQ.

• In FY22, impairment allowance for hire purchase segment increased 18.7% YoY to RM22.2m, driving up the credit loss charge to 4.1% from 3.2%. The higher impairment allowance was mainly due to an increase in impaired loan accounts caused by disruptions in hirers’ repayment patterns during the June-September 2021 lockdowns.

• We deemed that the special withdrawal facility of up to RM10,000 from Employees Provident Fund (EPF) in April 2022 may boost hirers’ repayment in the following quarter. Nevertheless, impairment allowance will likely remain volatile as the Covid- 19 Act 2020 which generally protects borrowers’ interest has been extended until October 2022.

• ELK’s hire purchase receivables stood at RM468.1m as at 4Q22, representing a 10.5% decrease from the previous corresponding quarter. Although Malaysia is transitioning into endemic phase and recovering economy bodes well for ELK’s hire purchase portfolio expansion, we reckon the expansion might be gradual as ELK remained cautious to preserve its asset quality. For the furniture segment, we foresee marginal growth in the near term with more work forces returning to office.

• Liabilities wise, ELK’s ongoing effort to pare down borrowings via the repayment of block discounting facilities and term loans has reduced its finance cost, providing a cushion to its bottomline. Gearing stood at 0.26x as compared to 0.44x in FY21.

Valuation & Recommendation

• As the earnings came below our expectations, we trimmed our earnings forecast by 15.9% to RM30.1m for FY23f, taking into account the volatility in impairment allowance and smaller hire purchase portfolio going forward. The FY24f earnings is projected at RM32.7m. Nevertheless, we are cautiously optimistic in the group’s longer term profit trajectory as the overall demand for used-car hire purchase financing will continue to recover amid normalisation of business activities.

• We retained our BUY recommendation on ELK, with a revised target price at RM1.47. The target price is a derived by ascribing a P/B of 0.95x to FY23f book value per share of RM1.54. 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 the rising living cost amid global inflation as well as the expiry of loan moratoriums given out by banks that may impact borrowers’ repayment ability. Besides, logistic disruption for raw material supply for the furniture segment could be another key risk.

Source: Mplus Research - 23 May 2022