ELK-Dena Resources ("ELK-Desa") recorded a strong start in 1QFY19 circa 60% jump in net profit, backed by solid growth in its hire purchase ("HP") portfolio. BUY with target price of RM1.38 based on P/B ratio of 1.0x as per its closest related peer, translating to 14x PER FY19. 

ELK-Desa has a competitive advantage on its unique exposure to the niche and underserved used car financing market specifically on small value financing which is generally not the focus of the typical financial institutions. The group adopted a niche business model by capping its financing amount at RM35,000 for small and medium size vehicle (2,400cc & below) to capture the lower range of used car auto financing market. To date, it has established more than 1,000 dealer networks mainly in the Kiang Valley area. 

Its net HP receivables has had grown at a CAGR of 15% over the last 5 years. Besides, the non-performing loans and cost-to-income ratio remains lower than industry average at a manageable level of 1.0% and 24.1% respectively. Current loan loss coverage stands strong at 342%, providing solid buffer against future credit losses. 

While the hire purchase segment remains the main revenue contributor (-70%), the group has also ventured into the furniture business in mid-2015. Despite minimal profit contribution, we believe this division could provide the group with a solid foundation to tap into the furniture HP business going forward. 

ELK-Dena has been paying above its dividend policy (60%) with an average payout ratio of around 72% over the last 3 years, translating to current attractive yield of 5.7%. We expect net HP receivables to grow around 12% for FY19 and FY20 as the current underserved market still provides ELK-Desa ample room to grow its HP division. 

Source: Rakuten Research - 3 Sept 2018