• ELK-Desa’s 1QFY21 net profit of RM2.3m (-75% yoy; -65% qoq) was below our expectation, accounting for 7.1% of our estimate (RM32.2m, prior to revisions). Main culprit was higher provisions for receivables impairment, due to the MCO.
• Based on management’s guidance, the significantly higher net credit cost of 246bps in 1QFY21 (vs. 94bps in 1QFY20) may not likely repeat in the subsequent quarters, as collections resumed after the MCO was lifted.
• We revised down FY21E net earnings by 21% as we raise our net credit cost assumption from 400bps to 633bps. Maintain HOLD, with a lower PT of RM1.40 from RM1.43.

1QFY21 Net Profit Down 75.2% Yoy; Steep Provisions Is Likely One-off

ELK-Desa saw 1QFY21 net profit at RM2.3m, down 75% yoy and 65% qoq, largely due to steep provisions (RM13.9m, +209% yoy) for its hire-purchase (HP) receivables. To recap, implementation of the MCO had affected the collections from hirers and hence, net credit cost in 1QFY21 has risen to 246bps vs. 94bps in 1QFY20. We understood that management has taken a precautionary move in 1QFY21 to set aside additional provisions for accounts which are not in under-performing status, and it was also preemptive in nature. That said, the subsequent quarters are likely to see net profit recovery. Meanwhile, its furniture division contributed only a mediocre amount of pre-tax profit, i.e. accounting for 8.5% of group PBT with sluggish revenue (-37.7% yoy) due to the MCO.

ELK-Desa’s Management to Stay Cautious Throughout FY21

Contrary to the banks’ relief measures (loan moratorium) to borrowers, ELK opted not to as management believes that by not doing so, it would be able to identify the good customers against those who could not cope with the repayments. Such a move in our view, will address the problems of these customers. We believe that though ELK’s gross NPL ratio could have potentially spiked from 1.4% at end-FY20 to 1.6% as at 1QFY21, the high loan loss cover of 360% would help to mitigate the risk higher provisions in case NPLs spike further. The situation now looks under-control under the RMCO phase, with collections improving though management remains cautious on expanding its HP receivables book too aggressively.

Maintain HOLD, With a Revised Price Target of RM1.40

We reiterate our HOLD rating on ELK, and adjust our 12-month Target Price from RM1.43 to RM1.40 (based on a 5-year mean P/E average of 13x on CY21E EPS). We revise down FY21E’s net earnings by 21% (raising net credit cost to 633bps from 400bps) though maintain FY22E-23E forecasts (NCC at 530-580bps). We expect Downside/upside risk – rise/decline in default rates.

Source: Affin Hwang Research - 14 Aug 2020