ELK-Desa’s 1HFY19 net profit of RM16.7m (+51.6% yoy; EPS +24% yoy) was above our expectations, driven by stronger profit contribution from its hire-purchase financing (which contributed 98% of pre-tax profit). Though contribution from the furniture segment is still insignificant, it continues to turnaround subsequent to management’s focus on domestic markets and forming new local partnerships. Strong hire-purchase receivables growth in 2QFY19 (+22% yoy; +5.4% qoq) was largely fuelled by management’s vertical expansion and higher disposal of cars into the 2nd-hand market during the GST-free period (for new cars). A 1st interim dividend of 3.5 sen was proposed in 2QFY19. We believe that there are some potential earnings upside to our forecasts given the strong results. Maintain BUY, Price Target of RM1.37 is unchanged.

2QFY19 Continued to be Robust, Net Profit +44.6% Yoy, +6.8% Qoq

ELK-Desa a 2QFY19 net profit of RM8.6m was up +44.6% yoy and +6.8% qoq, while EPS rose by 21% yoy. For 1HFY19, net profit of RM16.7m rose by 51.6% yoy (EPS +24.2% yoy) underpinned mainly by profits from its hire-purchase division (98% of PBT). The results was above our expectations for FY19E, given the strong receivables growth, of which in 2QFY19, rose by 22% yoy and 5.4% qoq. This was partially driven by higher transactions in the used car market, following upbeat new car sales during the GST-free period.

Management’s Strategies for HP and Furniture Division Bearing Fruts

The HP receivables saw a 22% yoy growth rate in 2QFY19, driven by management’s vertical expansion to finance cars priced at below RM35,000 (from <RM20k). The furniture division had started to see a turnaround in profits since 4QFY18 driven by shift in business strategy focus on expanding domestic wholesale distribution and local partnerships.

Maintain BUY With Price Target at 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. Downside risks – higher cost-of-living may cause higher defaults.

Source: Affin Hwang Research - 14 Nov 2018