We remain upbeat on ELK-Desa’s prospects (post meeting with management) as its focus in the mass market used-car financing business is expected to generate high-teens EPS growth in FY20-21E while its ROE is expected to expand further towards 10% from 8% in FY19. Being a relatively small player (receivables outstanding amount to 0.3% of the car-financing market in Malaysia), we see room for growth even in the Klang Valley alone, coupled with its strong support from car dealers. Ultimately, with additional leverage, ELK-Desa could potentially grow its receivables at 16%-20% p.a. Maintain BUY, PT at RM1.98 (at 13x CY20E P/E target).

Potential to Leverage Up Given a Debt-to-equity Ratio of 0.28x

ELK-Desa has taken the initiative to boost its receivables growth (up 23% yoy in FY19) through block discounting of payables, which was evident by the increase in the gearing level from 0.1x in FY18 to 0.28x in FY19. Though the rise in gearing was minimal, this had partially helped to bolster FY19 net profit by 27% yoy (on an EPS basis +13.3%). With expectation of a 16-20% growth in receivables p.a. and coupled with increased leverage, we believe that FY20E-21E EPS could grow by 17.3-21.5% yoy.

A Small Player Vis-à-vis Peers, But Plenty of Room for Growth

Compared to similar peers such as Aeon Credit and RCE Capital, whereby receivables size are far larger, we believe that ELK-Desa which operates on the same business model, has ample potential to leverage up and expand its scale. ELK-Desa’s gearing ratio stands at 0.28x compared to Aeon Credit at 2.7x and RCE Capital at 2.8x as at Mar19. In our view, industry dynamics remain in favour of ELK-Desa as it operates in a relatively steady used car financing market, whereby demand (primarily from the mass market) is not significantly affected by global trade and geopolitical uncertainties.

Reiterate BUY Rating, Price Target Unchanged at RM1.98

We Maintain Our BUY Rating and 12-month Price Target of RM1.98 (pegged to a 13x target P/E multiple on our CY20E EPS). We are upbeat on ELK-Desa’s prospects as it remains a prudent mass market HPfinancing player in the Klang Valley. We also foresee a potential re-rating of the stock through better dividend payouts and expansion in ROEs. Downside risk – rise in default rates.

Source: Affin Hwang Research - 17 Jun 2019