ELK-Desa reported a FY20 net profit of RM34.9m (+6.1% yoy); nonetheless, 4QFY20’s results were weaker at RM6.6m in net profit (-30.4% qoq, -23% yoy). Overall results were in-line with our expectations. As the group raised its leverage to 70.5% in FY20 vs. 28% in FY19, it saw robust growth of 28% in hire-purchase (HP) receivables. In 4QFY20, ELK was impacted by the movement control order (MCO), which disrupted customers’ repayment activities. As such, we saw a spike in 4QFY20’s credit cost, at circa 140bps for the quarter vs. 97.6bps in 4QFY19. Though the MCO will continue to have an impact on ELK’s HP collections in 1QFY21, we understand that it has since improved as restrictions were gradually eased from May onwards. We maintain our HOLD rating, with a revised TP of RM1.43.

FY20 Net Profit Up 6% Yoy, Partially Dampened by a Weaker 4QFY20

ELK-Desa reported a 4QFY20 net profit of RM6.6m, which declined 23% yoy and 30.4% qoq, largely due to higher provisions for its HP receivables subsequent to the implementation of the MCO. Overall, FY20 net profit of RM34.9m (+6.1% yoy) was within our expectation. The modest earnings growth was underpinned by robust HP receivables growth of 28% yoy, on the back of additional leverage through an MTN programme and expansion of its block-discounting facility. Its debt-to-equity ratio stood at 0.7x and we believe that there is still further room for growth towards the 1.5-2.0x debtto-equity level.

Maintaining FY21-22E Earnings, While Introducing FY23E

We remain cautious on ELK’s earnings outlook, as we foresee the risk of higher NPLs subsequent to a potential rise in theunemployment rate in our country due to the impact of the COVID-19 pandemic. Based on our assumptions, we expect net credit cost at 485-535bps and receivables growth at circa 5% yoy in FY21E-23E.

Maintain HOLD, With Revised Price Target of RM1.43

We reiterate our HOLD rating on ELK, and raise our 12-month Target Price from RM1.13 to RM1.43 (based on a 5-year mean P/E average of 13x on CY21E EPS). As the economy is expected to start recovering in 2H20, there could be some pockets of opportunities for ELK-Desa in the used-car market, given incentives given by the government on the exemption of sales taxes on new car purchases. Downside/upside risk – rise/decline in default rates.

Source: Affin Hwang Research - 10 Jun 2020