ELK-Desa’s 9MFY18 core net profit of RM18m (+8.6% yoy) was within our expectations. Receivables continued to grow at an annualized rate of 14.3% yoy, which in our view will continue to improve into 4QFY18. The hire purchase division remains the key earnings driver with the new money-lending license providing some positive catalysts, while the furniture segment showed some operational strains. We maintain our HOLD call and Price Target of RM1.18.

9MFY18 Results Within Expectations, Net Profit Improved Yoy & Qoq

ELK-Desa saw an improved 9MFY18 net profit of RM18.0m (+8.6% yoy), in line with our FY2018 forecast. This was mainly driven by higher profit contribution from the hire purchase (HP) division. However, 9MFY18 EPS was down 9.9% yoy due to dilutive effect of the RM54m rights issue and a 21% increase in weighted average number of shares. 3QFY18 earnings recorded an increase in earnings qoq also driven by higher contribution from the HP division offset by deterioration in the furniture division as it dropped into the red in 3QFY18.

Hire purchase financing driving earnings, strains in furniture division

The HP division contributed almost 100% of the 9MFY18 group pre-tax profit of RM24.5m which grew by 9.7% yoy. Underpinning this was an expansion of HP receivables growth by an annualized 14.3% yoy vis-à-vis our forecast of a 13.8% yoy growth for FY18E. The money-lending license which was obtained last quarter provides a positive catalyst as it opens up opportunities for the group to diversify its income. The furniture division, however, continued to face high operating expenses, recording a 90% drop in 9MFY18 profit despite a 4.9% increase in 9MFY18 revenue. This large drop was also contributed by a 218% jump in the furniture division’s impairment allowance due to slow payments from dealers.

Reiterate HOLD Rating, Price Target Unchanged at RM1.18

We maintain our HOLD rating and 12-month Price Target of RM1.18, which is pegged to a 13x P/E multiple on our CY18E EPS. Our P/E multiple of 13x is derived based on the 1-year historical average P/E multiple of ELK (of which, is not comparable to other peers due to ELK’s illiquidity in the market). Downside risk – high cost-of-living may cause higher defaults. Upside risk – strict credit approvals to control NPLs.

Source: Affin Hwang Research - 22 Feb 2018