• Initiate coverage with a NEUTRAL and GGM-derived MYR1.30 TP, 2% upside. While ELK-Desa Resources’s worst days are likely behind it, growth prospects appear muted as management strives to balance expansion and asset quality protection. We expect the company to book an earnings CAGR of 12% between FY22-25F (Mar), premised on modest hire purchase (HP) portfolio growth and receding impairment charges. We like the stock as a defensive dividend play, but believe its low P/BV multiple is justified given its historically low ROAE.

• Not quite out of the woods. Guidance from management points towards a slow recovery back towards pre-pandemic levels of HP receivables, as management strives to balance portfolio expansion with asset quality preservation. Major downside risks to asset quality including persistent inflationary concerns still linger, which could hinder the HP segment’s performance. However, the growing popularity of digital used car dealers such as Carsome could act as a strong catalyst for future receivables growth.

• Cost pressures to affect furniture segment. ELK’s furniture segment, which trades home furniture, grew substantially during the pandemic period as the country embraced a work-from-home (WFH) culture. While management expects strong demand for home furniture to be sustained, pressures on raw material cost and increasing operating expenses could negatively affect the segment’s performance.

• Consistent dividends a small bonus. ELK has consistently paid out 61- 68% of its net earnings as dividends, in line with its policy of not less than 60%. Barring any changes to its dividend policy, we believe the stock could be a decent defensive option given its strong track record. Our forecasts indicate a FY23F yield of c.5% based on the current share price.

• ESG efforts. Existing ESG plans are focused on improving internal processes. These include efforts such as digitisation, installation of solar panels for office use, and ensuring healthy diversity at the Board and Executive levels. As its peers are already engaged in external sustainability efforts, and/or have more robust ESG roadmaps, we award ELK the country median ESG score of 3.0 (Aeon Credit Service (ACSM MK, BUY, TP: MYR16.60): 3.2, RCE Capital (RCE MK, BUY, TP: MYR1.90): 3.1).

• Fairly valued. The stock is currently trading at 0.84x FY23F P/BV, which is a significant discount to its non-bank lender peers’ 1.6x. However, we believe its low valuation is justified, given its historically low ROAE of 5-8% vs the mid-to-high double digit average of its peers. Our TP is based on a GGM-derived 0.85x FY23F P/BV, with a 0% ESG premium/discount ascribed, as per our in-house proprietary methodology.

• Key risks include weaker-than-expected HP receivables growth, sustained high impairment charges, and adverse changes in regulations.

Source: RHB Research - 18 Jul 2022