ELK-Desa’s FY19 net profit of RM32.9m (+27% yoy; EPS +13.3% yoy) was below Affin’s expectation by 13%, largely due to higher operating expenses, although its HP receivables growth of 23% yoy outperformed our forecast of a 20% yoy growth. Overall, it was a favourable year following management’s move to expand financing of its receivables market, in addition to leveraging up. Though we revise down our FY20-21E earnings forecasts by 12-15% (for higher overheads), we remain upbeat on management’s vertical expansion plan. Maintain BUY with a higher RM1.98 Price Target (from RM1.70).

FY19 a Robust Year; Net Profit Jumped 27% Yoy

ELK-Desa reported a FY19 net profit of RM32.9m, up 27% yoy, while EPS rose by 13.3% yoy, underpinned primarily by profits from its hire-purchase (HP) division (98% of PBT). Subsequent to management’s move to expand its scope of financing for cars priced at below RM35,000 (from its previous policy for cars < RM20,000), its HP receivables saw a growth of 23% yoy vis-à-vis FY18’s receivables growth rate of 15% yoy. For FY19, ELKDesa’s HP-division credit cost improved to 5.5% (FY18) from 3.8%, representing a marked improvement in terms of asset quality. The furniture segment (though insignificant to pre-tax profit) continued to turn around.

Higher Leverage Partially Drives Up Profits and ROE

The shift in management’s strategy to leverage up since 3QFY19 has seen FY19’s borrowings increase by 126% to RM114.3m (from RM53m in FY18). Even so, its gearing ratio remains at a low of 0.28x (vs. other similar peers such as Aeon Credit at 4x). This move has resulted in improvements in net earnings and ROE (rose from 7.1% in FY18 to 8.1% in FY19).

Maintain BUY With a Revised Price Target of RM1.98 (from RM1.70)

As we revise our assumptions for ELK-Desa’s operating expenses (to factor in higher staff costs), we revise down FY20E-21E’s net earnings by 15.7% and 12.2% respectively. That said, ELK-Desa is still a BUY, given a potential upside of 43.6% based on our revised Price Target of RM1.98 (at a 13x P/E on CY20E EPS of 15.25 sen, rolled over from CY19). We remain upbeat on ELK-Desa as it remains an aggressive and prudent mass market HP-financing player in the Klang Valley. FY20-21E dividend yields remain attractive at 5.2-6.4%. Downside risks – higher default rates.

Source: Affin Hwang Research - 23 May 2019