• Stay BUY, new MYR1.92 TP from MYR2.00, 16% upside with c.5% FY23F (Mar) yield. RCE Capital’s 1QFY23 results missed expectations, mainly due to the conservative impairment of accounts. We expect provisions to normalise in the quarters ahead, as asset quality stabilises and recovery efforts are being stepped up. This, coupled with sustained financing demand, point to better earnings ahead. Contrary to concerns, we believe NIM compression would be manageable, given mitigation efforts by management.

• 1QFY23 results missed estimates. 1QFY23 net profit of MYR32.2m (+2% QoQ, -9% YoY), accounted for c.24% of our and consensus FY23F earnings. The YoY decline was mainly due to the full impairment of accounts that dropped off from the salary deduction scheme. PIOP grew by a modest 1.5% YoY, as lower income from early settlements led to a 5.5% YoY drop in net fund-based income, which offset the 27% YoY growth in other income. 1QFY23 ROAE was 14.8% vs 14.7% in 4QFY22.

• Asset quality. Impairment allowances spiked to MYR8.2m in 1QFY23 (4QFY22: MYR5.9m), matching the 4QFY20 peak seen during the COVID-19 pandemic. Management attributed this to the conservative full provisioning of exposures to borrowers that had left the civil service. There were noticeable resignations and early retirements within the academic and healthcare sectors. GILs rose 6.5% QoQ, lifting the GIL ratio to 4.0% vs 3.8% 4QFY23. Efforts are being made to recover the outstanding balances, which would result in write-backs, if successful. Management remains vigilant on asset quality, notwithstanding the improvement seen in July.

• Demand for financing still strong. Gross financing grew 1.4% QoQ (FY22: +1.8% YoY), helped by the economic reopening. Management believes growth is sustainable, given the strong momentum in financing applications. RCE has also launched some campaigns to capture the lending opportunity. We have pencilled in loan growth of 4% for FY23F.

• Working to manage NIM pressures. With all of RCE’s financing receivables on fixed rates, against 71.5% of its financing liabilities being on fixed rates as well, the rising interest rate environment would have a negative impact on NIM. To mitigate the NIM pressures, RCE is focusing on higher-profit rate products to boost asset yields, while the utilisation of floating rate revolving credits has helped to lower funding costs. These measures should help keep NIM compression manageable.

• Earnings and TP. With 1QFY23 PIOP within our expectations and credit cost likely to normalise, we make no changes to our FY23-25F earnings, for now. Our TP drops to MYR1.92 (from MYR2.00), as we refreshed our GGM assumptions for heighten macroeconomic risks. Our TP also incorporates a 2% premium to our intrinsic value for its ESG score of 3.10, based on our in- house proprietary methodology.

• The downside risks to our call includes: i) Higher-than-expected credit cost, and ii) weaker-than-expected financing growth and net financing margins.

Source: RHB Research - 12 Aug 2022