Summary

• ELKDESA 3Q23 core net profit advanced 37.5% YoY to RM7.6m, bringing a  significant 87.9% jump in FY23 core net profit to RM47.9m. The results, however,  came in below expectations, amounting to 94.2% of our full year forecast at  RM50.3m. Key deviations were largely due to lower-than-expected margin resulted  from higher operating costs. Meanwhile, a second interim dividend of 3.5 sen per  share, payable on 22nd June 2023 was declared.

• YoY, the bottom line soared on the back of higher contribution from (i) the hire  purchase segment as increase in revenue resulted from larger hire purchase  portfolio outweighed the increase in impairment allowance, and (ii) the furniture  segment due to lower freight charges as well as lower staff costs. QoQ, core net  profit shrank 31.4%, mainly due to lower contribution from the hire purchase  segment as impairment allowance climbed.

• The impairment allowance on hire purchase receivables increased 4.2% YoY to  RM6.8m, mainly due to slower hirer repayment. Credit loss charge however, declined  from 1.3% to 1.1% due to larger hire purchase portfolio which grew 22.9% YoY and  2.6% QoQ to RM575.1m to cater to higher demand for hire purchase financing  amidst post-pandemic environments.

• Liabilities wise, bank borrowings increased 69.3% YoY due to higher drawdown of  block discounting facilities to support the increased hire purchase receivables. As at  4Q23, ELKDESA’s gearing remained at a low level of 0.42 times.

• Moving into FY24, we anticipate a moderate growth in hire purchase receivables due  to the uncertain macro-economic conditions. Additionally, the used car financing  industry may require process changes to comply with the new regulatory oversight  by the Consumer Credit Oversight Board, which is expected to be implemented in  2024.

• For the furniture segment, we continue to like ELKDESA’s strategy to focus on the  domestic wholesale market to distribute its furniture products to over 800 furniture  retailers throughout Malaysia, especially in Sabah and Sarawak.

Valuation & Recommendation

• As the earnings came in below our expectations, we downgrade our earnings  forecast by 14.6% to RM41.4m for FY24f. Meanwhile, FY25f earnings forecast is  introduced at RM43.0m. The earnings forecast will take into account a modest  growth on the hire purchase portfolio, as well as the gradual improvement on the  furniture segment.

• We maintained our HOLD recommendation on ELKDESA, with a revised target price  of RM1.02 after taking into consideration the increase in number of share arising  from the bonus issue. The target price is derived by ascribing a P/B of 0.95x to  FY24f book value per share of RM1.07. Meanwhile, ELKDESA remained committed  to distribute not less than 60.0% of its net profit after tax.

• Downside risks to our recommendation include the tabling of Consumer Credit Act  (CCA). Upon implementation of the new CCA, ELKDESA might need to modify its  operational procedure to comply with the requirements of the Act. Additionally, any  logistics disruption could cause supply chain constraints and delay shipment for the  furniture segment.

Source: Mplus Research - 23 May 2023