• ELK-Desa’s 2QFY21 net profit came in at RM10.8m (+12.3% yoy; >100% qoq) while 1HFY21 net profit of RM12m (-36.3% yoy) was within our expectations. A substantial increase in receivables impairment (+78%) was the key dampener.
• 2QFY21 turned around with significantly lower provisions, as collections resumed subsequent to the RMCO period since June. 2QFY21 net credit cost (at group level) declined to an annualized 179bps vs. 960bps in 1QFY21.
• We maintain our FY21-23 forecasts, while more updates could be available from its upcoming briefing. Maintain HOLD, with PT unchanged at RM1.40. An interim DPS of 2.5 sen (vs. 3.5 sen in 2QFY20) was proposed.

2QFY21 net profit recovered, up 12.3% yoy and >100% qoq; within expectations

ELK saw a higher 2QFY21 PAT of RM10.8m, recovering by 12.3% yoy and >100% qoq, attributable to an 83.5% qoq decrease in the hire-purchase receivables impairment (equivalent to an annualized net credit cost of 179bps vs. 960bps in 1QFY21). Nonetheless, 1HFY21 net profit was still lower by 36% yoy, largely due to a weak 1QFY21. ELK’s 1HFY21 net credit cost now stands at an annualized 600bps, which is still much higher vs. an annualized 350bps in 1HFY20, as provisions have increased by 78% yoy (largely in 1QFY21). Overall, 1HFY21 revenue from the hire purchase segment was down 6.1% yoy underpinned by a 3% decline yoy in receivables growth. On a more positive note, revenue from the furniture division turned around sequentially in 2QFY21 following higher orders from showrooms during the RMCO period (from June onwards).

ELK-Desa’s management to stay cautious throughout FY21

ELKs management remains cautious on expanding its hire-purchase receivables book, which on a ytd-basis declined by 11.6% while qoq was also down by 5%. Contrary to the banks’ relief measures (loan moratorium) to borrowers, ELK opted not to do so as management believes that they would be able to identify the good customers against those who could not cope with the repayments. Nonetheless, the situation now looks under control despite the reimplementation of the CMCO.

Maintain HOLD, with Price Target unchanged at RM1.40

We reiterate our HOLD rating on ELK, and our 12-month Target Price at RM1.40 (based on a 5-year mean P/E average of 13x on CY21E EPS). There are no changes in our key assumptions for FY21E/22E/23E, with receivables growth at flat/+5.7%+4.6% and net credit cost at 633bps/535bps/580bps. In the near term, we do not foresee re-rating catalysts for a robust expansion in ELK’s receivables book, while the earnings outlook in 2HFY21 may appear unexciting. Downside/upside risks – rise/decline in default rates; slower/more robust receivables growth.

Source: Affin Hwang Research - 20 Nov 2020