•  At a post-2QFY21 results briefing, management shared that collections are back to normal though it has yet to turn aggressive on receivables growth.
• We do not expect the reinstatement of the CMCO since 14 Oct20 to have a detrimental impact, in our view, unless the situation worsens and results in the need of a state of emergency. Hence, it is likely that earnings in 2HFY21 will normalize.
• Maintain HOLD with a higher PT of RM1.53 (based on a 13x P/E multiple on the CY21E EPS of 12.1 sen) after earnings revisions of 10%-16.6%. We think it is too early for any rating upgrade due to concerns of weakness in the economy as the Covid-19 pandemic persists.

Collections have been on track, though the gross NPL ratio remains elevated

ELK’s management shared that receivables collections have been on track since the RMCO was implemented from 10 June20. Even the reinstatement of the CMCO from 14 Oct20 has not jeopardized collections and credit recovery efforts by ELK (which had also adopted the JomPay and ePay payment systems). Despite a high level of provisions (annualized 600bps) in 1HFY21, we continue to stay prudent in our FY21E forecasts and assumptions, with a net credit cost of 598bps. This is due to a decline in ELK’s loan loss cover from 359% in FY19 to 220% in FY20, subsequent to a sudden spike in its gross NPL ratio to 1.4% (at end-Mar20 vs. 1% prior to the MCO).

Earnings forecast revisions on better receivables yields and lower funding cost

The earnings forecast revisions of +16.6%/+10%/+11.5% for FY21-23E were driven by lower provisions (FY21E) and an improved receivables yield at ~17% (vs. 16.8%) as ELK had tightened credit risk management by charging a financing rate of 10% for new HP financing (vs. between 8.75% and 10% in previous approvals). We have also lowered our funding cost assumption slightly by about 20bps for FY21E-22E (as future MTN issuances will be at a lower interest rate of 4.8%). Our new assumptions for ELK (FY21E/22E/23E) are as follows: i) receivables growth at -3.2% / +5.5% / +9.6%; and ii) net credit costs at 598bps / 534bps / 527bps. These were revised from flat / +5.7% / +4.6% for receivables growth and 633bps / 535bps / 580bps for net credit costs.

Maintain HOLD With a Higher 12-month Price Target of RM1.53

We reiterate our HOLD rating with a higher PT of RM1.53 (based on a P/E target of 13x on the CY21E EPS of 12.1 sen) from RM1.40 previously. Though management said that demand for financing of used cars continued to be resilient, it remains conservative on portfolio expansion. Meanwhile, as car repossession activities have been suspended by the government (Oct-Dec20), the risk of a further extension may also jeopardize its credit recovery effort. Downside/upside risks: weaker/improved asset quality, decline/stronger receivables growth and a spike/decline in the unemployment rate

Source: Affin Hwang Research - 23 Nov 2020