ELK-Desa’s 6MFY20 net profit came in at RM18.9m (+13.2% yoy), while the 2QFY20 net profit of RM9.6m (+3.7% qoq, +11.5% yoy) was within Affin’s expectation. The robust quarter was underpinned by HP receivables growth of 27% yoy, supported by the group’s strategy to leverage up (with total borrowings up 85% yoy). ELK-Desa’s annualized credit cost of 358bps for 6MFY20 was well within our expectations. As a relatively small player (total receivables outstanding at ~0.3% of Malaysia’s car-financing market) and given strong support from car dealers, it has room for growth even in Klang Valley alone, in our view. We project ELK-Desa to grow its receivables at 16-20% p.a. Reaffirm BUY call and TP of RM1.98 (at 13x CY20E EPS).

2QFY20 Net Profit Continued to Expand 3.7% Qoq

ELK-Desa reported a 2QFY20 net profit of RM9.6m, up 11.5% yoy and 3.7% qoq. The 6MFY20 net profit of RM1839m (+13.2% yoy) was within our expectations. The robust growth was underpinned primarily by its hirepurchase (HP) receivables growth of 27% yoy, following management’s decision to leverage up through the drawdown of MTNs and expansion of its block-discounting facility. Its leverage ratio stood at 0.6x and we believe that there is still further room for growth towards the 1.5-2.0x debt-to-equity level. The 6MFY20 profit from its hire-purchase (HP) division accounted for 96.7% of group PBT. The furniture segment (though insignificant to pre-tax profit) continued to turn around.

Annualized 6MFY20 Credit Cost Is Within Our Expectations

ELK-Desa saw a stable HP-division net credit cost of 179bps or 358bps on an annualized basis. This is within our FY20E assumption of 355bps. The stable credit charge rate was due to its sound asset quality and recovery efforts.

Maintain BUY at Our Price Target of RM1.98 (at 13x P/E Multiple)

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 ELK-Desa’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 - 20 Nov 2019