We continue to recommend RCE Capital Bhd (“RCE”) as its valuation is deemed attractive coupled with its defensive nature with anticipated dividend yield of ~6%. Current P/BV ratio of 0.91x is below its 3-year average of P/BV 1.06x. Maintain BUY with target price of RM1.95, based on 1.06x FY20 P/BV, implying a 6.7x FY20 PER.

To recap, RCE is a provider of personal loans financing predominantly to civil servants. The group is ultimately owned by Tan Sri Azman Hashim from his interests in Cempaka Empayar Sdn Bhd. Loan repayments from the civil servants are done via a salary deduction scheme thereby minimising default rate. RCE serves close to 80,000 customers and we believe there is still ample room for growth as its market share is only 5% of the 1.6m civil servants in Malaysia.

Key competitive edge of RCE over its peers is swift disbursements within 48 hours, which is one of the fastest in the market supported by approximately 20 marketing representatives. Average loan size is approximately RM16,600 with maximum loan tenure of 10 years. Loans growth is steady with CAGR of 10% in the past 5 years.

Expansion of quality loans remains the priority of the group complemented by regular review of credit practices and credit scoring models. Asset quality enhancement can be shown by the improvement in Gross impaired loans ratio of 13.7% in FY13 compared with 7.4% in FY19. Non-performing loans ratio is at a healthy rate of ~4%.

RCE enjoys a sturdy net interest margin of ~8% vis-à-vis the banking sector of 2.3%. Loan loss coverage of ~170% is much higher than the banking industry demonstrating stringent credit risk management. RCE has over the years managed to consistently enhance its borrowing mix towards cheaper cost of funds. The newly established RM2bn Sukuk programme of which the first three tranches were issued at a lower weighted average profit rate compared with previous RM900m Sukuk programme.

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 4.3x. Trading at a discount to its 3- year P/BV plus decent dividend yield, RCE is indeed an interesting value proposition.

Source: Rakuten Research - 13 Feb 2020