ELK-Desa’s 1QFY20 net profit of RM9.3m (+14.9% yoy; +9.0% qoq) was within Affin’s expectation. The robust quarter was underpinned by HP receivables growth of 24% yoy and relatively stable EBIT margin. Overall, it was a a good start for FY20 following management’s move to leverage up while being prudent and selective in credit approvals. As a relatively small player (total receivables outstanding at ~0.3% of Malaysia’s car-financing market), we see room for growth even in the Klang Valley alone, coupled with strong support from car dealers. Ultimately, with more leverage, ELK-Desa could grow its receivables at 16-20% p.a. Reaffirm our BUY call and TP of RM1.98 (at 13x CY20E EPS).

1QFY20 a Robust Start; Net Profit Expanded by 14.9% Yoy

ELK-Desa reported a 1QFY20 net profit of RM9.3m, up 14.9% yoy and 9.0% qoq, underpinned primarily by profits from its hire-purchase (HP) division (97.2% 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 24% yoy as at 1QFY20 (annualized growth rate at 30.6%) vis-à-vis FY19’s receivables growth rate of 23% yoy. For 1QFY20, ELK-Desa’s HP-division credit cost was relatively stable at 3.76% (annualized) from 3.8% (FY19), arising from recoveries from receivables. 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 1QFY20’s borrowings increase to RM131m from RM100m in Sept18. Even so, its gearing ratio remains at a low of 0.31x (vs. other similar peers such as Aeon Credit at 3.66x). This move has resulted in improvements in net earnings and ROE (rose from 7.1% in FY18 to 8.1% in FY19 and 9.0% annualized 1QFY20).

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

We reiterate our BUY call and 12-month Target Price of RM1.98 (based on a 13x target P/E multiple on our CY20E EPS). We remain upbeat on ELKDesa’s prospects as it remains a prudent mass-market HP-financing player in the Klang Valley. We also see better dividend payouts and expansion in ROE driving a re-rating of the stock. Downside risk – rise in default rates.

Source: Affin Hwang Research - 23 Aug 2019