We recently met up with ELK’s management to get an update on the business strategy moving forward and a review of ELK’s 9MFY18 results. Management has been more upbeat lately, shifting their hire purchase strategy to include financing higher value used-cars, while looking at restructuring the furniture business’ core operations. Though management’s initiatives sound optimistic, we make no changes to our earnings forecasts at the moment. Maintain HOLD with an unchanged TP of RM1.18.

Vertical Expansion in Hire Purchase Financing to Drive Growth

Management recently indicated that their strategy moving forward would be to focus on financing used cars with values of RM35,000 and below. This will be in addition to the current strategy of focusing only on used cars with values of RM20,000 and below. We believe that this diversification will contribute positively to ELK’s receivables growth, while remaining within ELK’s prudent risk appetite.

Furniture Segment Yet to Bear Fruit, Refocusing on the Home Ground

ELK is currently undertaking an operational restructuring in the furniture segment to refocus their sales in the domestic market. In addition to their retail outlets, management indicated plans to partner with other dealers and expand their wholesale distribution to drive sales.

Future EPS Dilution Could be Minimized Through Leverage

ELK’s 9MFY18 EPS declined by 9.9% yoy as a result of dilutive effect of a RM54m rights issue (completed in Sept 2017), which had caused the weighted average number of shares to increase by 21%. In our view, future EPS dilution could be minimzed through leverage as management expands its business. As at Dec2017, ELK’s group gearing level is at 0.12x and has ample room to gear-up

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. We do note that strategy shifts in both the hire purchase and furniture segments could provide upside potential to our earnings estimates. Downside risk – high cost-of-living may cause higher defaults. Upside risk – strict credit approvals to control NPLs.

Source: Affin Hwang Research - 30 Mar 2018