Our investment thesis on ELK-Desa remains unchanged. We continue to like the company, which has a special niche in the financing of mass-market used cars in the Klang Valley. Its key strengths, e.g. expertise in the hire-purchase financing business, strong dealer network, robust receivables growth (through leverage) and sound credit management – all work to boost the group’s earnings and ROE (10% in FY21E from 8% in FY19). We believe that there is still ample opportunity for ELK-Desa to tap into the used car market – robust Proton and Perodua sales in 2H19 indicate that the mass market is not facing severe constraints and that the B40 and M40 consumption spending are still intact. We reaffirm our BUY call and TP of RM1.98 (at 13x CY20E EPS).

National Car Sales in 2019 Continue to Gain Ground – a Good Sign

The robust national car sales in 2019 is a good sign and bodes well for ELK’s prospects. It is highly likely that whenever car owners (the B40 and M40 groups) need to upgrade, they would first dispose of their existing cars in the used-car market. This is where hire-purchase (HP) financing players such as ELK will finance the transactions at rates of 8.75-10%.

ELK Could be Playing Catch-up With Aeon Credit

Based on our comparison of ELK’s HP receivables with that of its closest peer, Aeon Credit (which is 5x bigger than ELK), we believe that there is potential for ELK to catch up over the years through the use of leverage. Based on a hypothetical scenario, should ELK make full use of its outstanding MTN facility (~RM850m), it could double its balance sheet and achieve a pre-tax profit of RM85m, based on gross receivables of RM1.4bn (as against current gross receivables of below RM600m).

Reiterating BUY Rating and Target Price of RM1.98

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 are 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 in line with an expansion in earnings, estimated at a 3-year forward CAGR of 15.6%. Downside risk – rise in default rates.

Source: Affin Hwang Research - 5 Feb 2020