• Company profile. ELK-Desa Resources Berhad (ELK) via its wholly owned subsidiary, ELK-Desa Capital Sdn Bhd is involved in the business of hire purchase financing for used motor vehicles. Besides, the Group is involved in selling general insurance policies as an insurance agent. During the financial year ended 31 March 2016, ELK has diversified into furniture business by acquiring three newly incorporated wholly owned subsidiary companies whose principal activities are in trading, wholesaling and manufacturing of furniture.

• Growing hire purchase business... Revenue for the primary business grew 19% to RM17.4m in 4Q17 vs RM14.6m in 4Q16. For full year FY17, revenue advanced 17% to RM65.4m in FY17 vs RM56.0m in FY16 mainly due to improvements in hire purchase portfolio. Also, management is expecting demand for second hand car financing to sustain in FY18 as the group’s operation is relatively niche as compared to the overall auto financing industry.

• …diversification into furniture business. Although this new segment only contributed marginal profit for the group, revenue expanded more than three-fold to RM29.0m in FY17 compared to RM8.2m in FY16. We view this favourably as the furniture business is still in early development stage and the group will focus on enhancing operational efficiencies in various divisions to obtain better margins for FY18.

• Steady dividend paymaster. ELK has been rewarding shareholders since the IPO days. We opine that the stable dividend payout will cushion out the volatility in the share price over the near term. At this current juncture, the final dividend of 3.5sen translates to a dividend yield of 5.4%.

• Technical outlook. On the weekly chart, ELK has formed a base near the RM1.20 level with a potential upward move towards the RM1.32 level (weekly SMA200). Meanwhile, on the daily chart, share prices have been trending sideways between the RM1.20-1.25 levels after rebounding off the RM1.20 level. Monitor for a breakout above RM1.25, targeting RM1.32-1.42. Support will be pegged around RM1.18-1.20, with a cut loss point set around RM1.16.

Source: Hong Leong Investment Bank Research - 14 Jun 2017