ELK-Desa’s 9MFY20 net profit came in at RM28.3m (+16.1% yoy), underpinned by 3QFY20’s net profit of RM9.4m (-1.9% qoq, +22.3% yoy). The 9MFY20 results came in within Affin’s expectations. ELK’s hirepurchase receivables continued to grow at a robust rate of 32% yoy, while expanding by 8.6% qoq. Based on management’s prudent credit underwriting policies, overall 9MFY20 provisions, as measured by credit cost, stood at circa 360bps while 3QFY20 itself saw an increase of 82bps qoq to 431bps. Given our expectation of a moderation in the macro environment in 1H20 following the Covid-19 outbreak, we are of the view that there will be weaker credit growth (FY20E: +21% yoy; FY21E: 15% yoy) and also higher risk of NPLs. We cut our FY20-22E earnings by 5.7- 9.1%. to factor in higher credit costs We maintain our BUY call, but with a lower TP of RM1.82 (at 13x CY20E EPS) from RM1.98 previously.

9MFY20 Net Profit Up 16% Yoy; Receivables Growth at 32% Yoy

ELK-Desa reported a 3QFY20 net profit of RM9.4m, up 22.3% yoy though down by 1.9% qoq (due to a higher tax rate; 3QFY20 pre-tax profit, however, rose 3.3% qoq). The 9MFY20 net profit of RM28.3m (+16.1% yoy) was within our expectations. The robust growth was underpinned primarily by its hirepurchase (HP) receivables growth of 32% yoy, on the back of additional leverage through an MTN programme and expansion of its block-discounting facility. Its net-debt-to-equity stood at 0.46x and we believe that there is still further room for growth towards the 1.5-2.0x debt-to-equity level.

Cutting FY20-22E Earnings 5.7-9% Due to Risk of Higher NPLs

In line with our house view of a more prolonged caution in the market, we foresee that the risk of higher NPLs may creep up within the banking and nonbank operators. As such, we trim ELK’s FY20E-22E earnings by 5.7-9.1% as we raise our credit-cost assumptions from 355-368bps to 407-432bps.

Maintain BUY with a revised Price Target of RM1.82 (at 13x P/E multiple)

We reiterate our BUY call on ELK but with a lower 12-month Target Price of RM1.82 (based on a 13x target P/E multiple on our CY20E EPS). That said, despite a more prolonged caution in the market, 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 dividends and expansion in ROE potentially driving a re-rating of the stock. Downside risk – rise in default rates.

Source: Affin Hwang Research - 19 Feb 2020