RCE Capital Bhd (“RCE”) is a provider of personal loans predominantly to civil servants which has achieved a steady 5-year CAGR loan growth of 10%. RCE’s valuation is deemed attractive given its current P/BV ratio of 0.9x and dividend yield of 5.8%. BUY with a target price of RM1.95 based on 1.1x FY20 P/BV as per its 3-year average, implying a 6.7x of FY20 PER.

RCE is 59.5% owned by Cempaka Empayar Sdn Bhd, a wholly owned subsidiary of Amcorp Group (“Amcorp”). Amcorp is a private flagship company owned by Tan Sri Azman Hashim and has a 13% stake in AMMB Holdings Bhd. To date, RCE serves close to 80,000 customers and loan repayments from the civil servants are done via a salary deduction scheme. We believe there is still ample room to grow its customer base as RCE’s market share is only 5% of the 1.6m civil servants in Malaysia. At present, average loan size is approximately RM16,600 with maximum loan tenure of 10 years.

Notwithstanding RCE’s fast disbursement of within 48 hours, its priority on quality loans growth is evidenced by its asset quality improvement. Gross Impaired Loans ratio improved from 13.7% in FY13 to 7.4% in FY19 while Non-Performing Loans ratio is at a healthy rate of ~4%. Loan loss coverage of 168% is higher than the banking industry’s average of 127%, demonstrating stringent credit risk management. Notably, RCE also enjoys net interest margin of ~8%, higher than its industry peers.

RCE has over the years managed to consistently enhance its borrowing mix towards cheaper cost of funds. Recently, the group established a new RM2bn Sukuk programme with the first tranche (RM265m) and second tranche (RM108m) issued at weighted average profit rate (“WAPR”) of 4.92% and 4.54% respectively, which is much lower than the previous RM900m Sukuk programme’s WAPR of 5.4%.

RCE has a stable dividend payout ratio ranging from 20%- 40%. Gearing ratio of 1.8x is manageable and lower than its closest peers’ average of 4.1x. Trading at a discount to industry P/BV of 1.1x, RCE’s prevailing valuation is undemanding backed by an anticipated dividend yield of ~6% offers defensiveness amid the challenging market scenario.

Source: Rakuten Research - 29 Oct 2019