• ELK-Desa’s 3QFY21 net profit came in at RM9.1m (-3.7% yoy; -16% qoq) while 9MFY21 net profit was RM21.1m (-25.4% yoy). Overall results were within our expectations
• 3QFY21 appeared steady with normalized provisions (since 2QFY21) as the annualized net credit cost (NCC) stood at 247bps vs. 960bps in 1QFY21. We also saw a lower level of receivables outstanding (-13.1% yoy)
• Maintain HOLD, with 12-month PT adjusted to RM1.50 (based on a 13x P/E target on CY21E EPS; from RM1.53) subsequent to earnings revisions.

3QFY21 Profits Continued to Hold Up; Within Expectations

ELK’s 3QFY21 PAT held up well at RM9.1m despite being down by 3.7% yoy and 15.9% qoq, with most of the pre-tax profit generation underpinned by the hire-purchase segment (at 89%) while furniture contributed 11%. 9MFY21 PAT was, however, 25% lower yoy, largely due to a weak 1QFY21. To recap, ELK’s management had set aside some preemptive provision in 1QFY21 (which saw an annualized NCC rising to 960bps), but the NCC eased subsequently to 179bps (annualized) in 2QFY21 and 247bps in 3QFY21. We expect a FY21 NCC of ~500bps (based on our revised assumption). Overall, 9MFY21 revenue from the hire purchase segment was down 9.8% yoy as the outstanding receivables have been on a declining trend throughout 1Q-3QFY21 (down 13% yoy as at Dec20). This was, however, mitigated by a better receivables yield sequentially (improving from 16.8% to 17.4% qoq) as new HP originations were charged the maximum financing rate of 10%. On a more positive note, the furniture division has seen a turnaround in revenue and more orders since 2QFY21.

Revision in assumptions for FY21E – lower receivables outstanding; lower NCC

We revised our assumptions for FY21E with receivables outstanding down 15% yoy (versus -3% yoy previously) and FY22E-23E growth rates at 5.5% and 8.0% yoy, respectively. In tandem with the reduction in receivables outstanding, our NCC assumptions are also reduced to 500bps/500bps/426bps for FY21-23E (from 598bps/534bps/ 527bps). These resulted in a -4.7%/-3.1%/-1% revisions in FY21E/22E/23E net profits.

Maintain HOLD, With Price Target Lowered to RM1.50

We reiterate our HOLD rating on ELK, based on our revised 12-month PT of RM1.50 (based on an unchanged 5-year mean P/E of 13x on CY21E EPS). In the near term, we do not foresee many re-rating catalysts for a robust expansion in ELK’s receivables book, as management may continue with its prudent approach. Meanwhile, we note that ELK’s loan loss cover continued to provide adequate buffer at ~200%. Downside/upside risks: rise/decline in default rates; slower/more robust receivables growth.

Source: Affin Hwang Research - 19 Feb 2021