We remain positive on RCE Capital Bhd (“RCE”) as a defensive play with anticipated dividend yield of ~6% supported by decent asset quality. RCE stands at an attractive position as it is benefiting from the low interest rate environment towards cheaper cost of funding. We continue to recommend BUY with a higher target price of RM2.39 based on 1.0x FY21 P/BV, as per 3-year average valuation, implying a 6.8x FY21 PER.

Loans application and submission are back to pre-Movement Control Order level and thus we expect earnings and loans disbursement to normalise moving forward. Meanwhile, the loan moratorium has a minimal impact on RCE given its position as Nonbank Financial institution and less than 0.6% of the accounts are under the moratorium. The moratorium is on voluntary basis and subject to approval.

Looking ahead, RCE has successfully converted from conventional to Syariah financing in May 2020. The group is in the midst applying for the inclusion into KLSE Shariah counter by end-2021. If successful, it will further attract buying interest especially from the institutional funds as there are presently only three Shariah-Compliant stocks under the category of financial services.

The group has issued the fourth tranche (RM127m) of the total RM2bn Sukuk programme in Sept 2020 and fifth tranche of RM106m will be issued on Nov 2020 tentatively at much lower rate. Note that the weighted average rate has been on a declining mode from 4.9% in the first tranche to below 3.4% in the fourth tranche for the RM2bn Sukuk programme.

Asset quality remains sound with non-performing loans at a healthy rate of ~4% as the salary deduction scheme for loan repayment ensures minimal default risk. Notably, net interest margin of ~8% is much higher than the average within the banking industry which is below 2% presently. Cost-to-income ratio of 23% is much lower than the industry average while high loan loss coverage of 168.5% demonstrates stringent credit risk management.

RCE has a stable dividend payout ratio ranging from 20%- 40%, giving an expected dividend yield of 6.3% in FY21. We see potential growth on RCE to expand its market share on the back of proven track record and its respectable yield offers an interesting value proposition.

Source: Rakuten Research - 8 Oct 2020