Expansion Plans to Drive Growth

ELK-Desa’s FY18 net profit of RM25.9m (+12.6% yoy) was in-line with our expectations. The hire purchase division remains the key earnings driver while the furniture segment showed stronger bottomline profits arising from a shift in business strategy to focus on domestic markets and forming new partnerships with local dealers. As we roll-forward our valuation to CY19, we adjust our Price Target to RM1.37 (from of RM1.18) based on a 13x P/E target. Upgrade to BUY as we remain upbeat on ELK’s vertical expansion plan in the hire-purchase financing unit, which will be the key earnings driver in FY19E-20E.

FY18 results within expectations, 4Q18 net profit improved yoy & qoq

ELK-Desa FY18 net profit of RM25.9m grew by +12.6% yoy, in line with our FY2018 forecast. This was mainly driven by higher profit contribution from the hire purchase (HP) division and better profits from the furniture division. Nonetheless, FY18 EPS was down 7.2% yoy due to the dilutive effect of the RM54m rights issue and a 21% increase in weighted average number of shares. Meanwhile, 4QFY18 earnings recorded a stronger 24.2% qoq increase, driven by higher contribution from the HP division (4QFY18 pretax profit +8.5% qoq) while the furniture division returned to the black from a loss-making 3QFY18.

Hire Purchase Drives 99% of Earnings, Furniture Division Turnaround

The HP division contributed circa 99% of the group’s FY18 pre-tax profit of RM35.3m which grew by 15.5% yoy. Underpinning this was an expansion of HP net receivables growth of 11% yoy for FY18. The furniture division saw a turnaround in 4QFY18 profits on the back of a shift in business strategy to refocus on the domestic market to expand the wholesale distribution and increase partnership with dealers.

Upgrade to BUY Rating, Price Target Raised to RM1.37

We Upgrade ELK From a HOLD to BUY Based on a CY19 Price Target of RM1.37, which is pegged to a 13x P/E multiple on our CY19E EPS (as we move our valuation horizon from CY18 to CY19), from RM1.18. Our P/E multiple of 13x is derived from 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.

Source: Affin Hwang Research - 25 May 2018