ELK-Desa’s 1QFY19 net profit of RM8.1m (+60% yoy; EPS +28% yoy) was broadly within our expectations, driven by stronger profit contribution from its hire-purchase financing (which contributed 98.5% of pre-tax profit). Meanwhile the furniture segment saw bottomline profits improving marginally arising from a shift in business strategy to focus on domestic markets and forming new partnerships with local dealers. We believe that ELK will continue to see another robust quarter in 2QFY19 (before normalizing in 2HFY19) arising from more upbeat new car sales (following the GST-free period), which had resulted in higher disposal of cars into the 2ndhand market. Maintain BUY as we remain upbeat on ELK’s vertical expansion plan in the hire-purchase financing unit.

1QFY19 Results Were Robust, Net Profit +60% Yoy; EPS +28% Yoy

ELK-Desa a 1QFY19 net profit of RM8.1m grew by +60% yoy while EPS rose by 28% yoy. We believe that the results are broadly in-line with our FY2019E forecast, as the anticipated robust net profit growth in 1HFY19 may eventually taper-off in 2HFY19, following upbeat new car sales during the GST-free period, of which had resulted in higher disposal of cars into the 2nd car market (ELK’s core focus). 98.5% of 1QFY19 pre-tax profit was driven by the HP division, while contribution from the furniture division remains minimal despite a higher topline revenue.

Hire Purchase Receivables Grew by 18% Yoy

The HP receivables saw an expansion of 18% yoy in 1QFY19, partially driven by management’s conscious move to expand financing of 2nd hand cars from below RM20,000 to below RM35,000. The furniture division had started to see a turnaround in profits since 4QFY18 driven by shift in business strategy to refocus on the domestic market to expand the wholesale distribution and increase partnership with dealers.

Maintain BUY, Price Target Raised to RM1.37

Maintain BUY based on a CY19 Price Target of RM1.37, which is pegged to a 13x P/E multiple on our CY19E EPS. 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 - 17 Aug 2018