INVESTMENT MERIT

We are placing a “Not Rated” call on ELKDESA with fair value of RM1.30. Its niche in providing hire purchase for used cars is expected to stay resilient having registered 5- year revenue CAGR of 12.2% (Sep 2018), which outpaced the CAGR of total registered vehicles in Klang Valley of 3.5%. Earnings from its new furniture segment may continue to be soft, but we believe focused efforts to capture market share could pay off in the long run.

Catering to a niche market. With operations mainly in the Klang Valley, ELKDESA focuses on providing hire purchase for small-value used cars. Typically a segment not prioritised by full-fledged financial institutions due to low value returns, the benefits of operating in this area include: (i) less competition, and (ii) wider consumer base (i.e. due to better affordability). Despite being deemed as a “riskier” market, the group was able to command a non-performing loan (NPL) ratio of 1.0% in FY18 (Marchending), while its peers appeared to be registering NPL of c.2.0%. We gather that the group registered a 12.2% 5-year CAGR for its hire purchase income at FY18, whereas the total number of registered vehicles in the Klang Valley only saw a 3.5% 5-year CAGR for the same period (source: Malaysian Automotive Association). The sustainability in this segment could be attributed by the group’s relationship with used-car dealers (currently with a network of above 1,000 dealers) which are the frontlines for the group’s service (refer to the overleaf for other fundamental comparisons against industry peer).

Branching out to furniture. Commencing in FY16, this venture involves the wholesaling of home furniture and operations of two local showrooms, while also exporting to the ASEAN region, Middle East and North America. As at FY18, it generated sales of RM31.0m and PBT of RM0.6m (margin of 1.9%). In the near-term, management aims to continue expanding its dealer-base which we believe may incur intensive marketing spending. Still, there could be opportunity for the group to firmly establish itself in this industry, as it yet appears to be saturated in view of the segment sales growth since inception.

With near-term prospects held by the above, we believe the group is poised to demonstrate a 20%/16% top-line growth in FY19/FY20, backed by high-teens growth in both segments. We believe that transactions in the second-hand car market are less susceptible to adverse changes in consumer spending as compared to new car sales while the furniture segment could be supported by its export exposure. This could translate to a PATAMI of RM34.5m/RM37.1m (+33%/+8% YoY). Dividend outlook could be solid as well. While the group have a minimum 60% dividend policy, we gathered that the historical payout ratio was at an average of c.70% during the last three years. Applying this rate, we could expect FY19/FY20 to see dividends of 8.5 sen/9.0 sen, translating to yields of 6.4%/6.8%.

“Not Rated” with a fair value of RM1.30. Our Target Price is based on an ascribed 10.0x PER on its FY20E EPS of 12.9 sen. We see the stock as a predominantly finance company, hence we base our valuation on a discount from our ascribed 11.0x Fwd. PER to AEONCR (a peer in the hire purchase space, albeit with mixed exposure in other financing segments). AEONCR, in addition to being a large cap counter, commands a higher ROE of c.18% while ELKDESA’s expected ROE is c.9% in FY20. However, we believe ELKDESA is compensated by its higher dividend (against AEONCR’s FY19E yield of 3.1%) and exposure to a more niche and stable market segment.

Source: Kenanga Research - 30 Jan 2019