To recap, ELK-Desa’s 1HFY19 results outperformed our expectations (due to stronger receivables growth and lower credit cost). Subsequent to a recent meeting with management, we are of the view that its earnings outlook in 2HFY19 will continue to remain resilient. Hence, as we revise up our FY19E-21E FD EPS forecasts by 9.3%/10.3%/11.6%, this has led to an uplift in our TP from RM1.37 to RM1.70. Management’s strategy has not changed, stepping up its vertical expansion focus in the used-car hire-purchase markets and maintaining domestic dealer partnerships in its furniture business. Maintain BUY.

Strong Receivables Growth and Improving Credit Quality

Based on ELK-Desa’s 1HFY19 financial results, the group had seen strong receivables growth of 22.4% yoy (against our FY19E assumption of 12% yoy) while operating expenses were lower than our forecasts attributable to sharply lower receivables allowances (as the annualized net credit cost came in at 354bps vs. our FY19E forecast of 644bps). Its credit quality has continued improving, as reflected by a gross NPL ratio of 1.0% (as at FY18) from 1.2% in FY17. As there are no signs of significant macroeconomic deterioration while government policies have remained in favour of the B40 and M40 mass population group, the level of default will continue to stay low, in our view. Meanwhile, ELK’s expansion into the financing of used-cars valued at RM35,000 and below (from

FY19E/20E/21E FD EPS Raised by 9.3%/10.3%/11.6

As we pencil in a stronger receivables growth of circa 20% p.a. for FY19E- 21E and reduce our credit cost assumptions from 610-640bps to circa 355bps, we saw our FY19E/20E/21E EPS being raised by 9.3-11.6%.

Reiterate BUY Rating, Price Target Raised to RM1.70 From RM1.37

Maintain BUY, with our CY19 Price Target now raised to RM1.70 (based on an unchanged PER target of 13x on a revised CY19E EPS of 13 sen) from RM1.37. We remain upbeat on ELK-Desa as: i) the stock is viewed as a safe haven in volatile markets given a resilient earnings outlook against a backdrop of moderating global growth; ii) dividend yields remain attractive at 5.7-8.9% (at 60% payout ratio); iii) a potential expansion of leverage will drive potential upside in EPS and minimize dilution effects from the last two rights issues. Downside risk is higher defaults.

Source: Affin Hwang Research - 31 Dec 2018