• D/G to NEUTRAL from Buy with a new GGM-derived MYR1.95 TP from MYR1.92, 10% upside and c.5% yield. 1HFY23 (Mar) results met our and Street’s estimates but with a surprise special dividend of 18 sen/share declared (additional yield of +10%). While we expect the share price to rise as a reaction, the recent price rally leads us to believe that the stock is already fairly valued at c.1.5x P/BV – above +1SD from its 5-year mean.

• 1HFY23 earnings within expectations. RCE Capital recorded net earnings of MYR68.8m – in line with our and Street’s forecasts. Earnings growth was a positive 2.7% YoY, largely driven by higher net interest and non-II (+3% and +11%) but offset by an increase in impairment allowances. ROAE at half time stood at 16.3%. The company declared an interim dividend of 5 sen/share on top of a special dividend of 18 sen/share as a general reward to shareholders.

• Financing growth is a pleasant surprise. Gross financing at 30 Sep stood at MYR1.96bn (+6% YoY, +4% YTD) against our previous forecast of 4% for the full year. Management claims that appetite for financing among civil servants remains strong despite increasing pressure on cost of living and the rising interest rate environment. While no specific guidance was provided, management is hopeful that RCE’s financing growth can track the wider banking industry’s, which is growing at a mid-single-digit rate.

• Slight improvement in asset quality. RCE recorded impairment allowances of MYR6.9m in 2QFY23 – down 16% QoQ, but up almost tenfold vis-à-vis 2QFY22. Recall that early provisions were made for civil servants – mostly teachers and healthcare sector workers – exiting public service in 1Q, with the same trend continuing into 2Q but to a lesser extent. Regardless, repayment trends from customers appear to be stable and within expectations, with credit costs of 142bps in 2Q having more or less normalised back to pre-pandemic levels of 100-200bps.

• Forecasts and valuation. Our forecasts remain relatively unchanged, as increased financing growth assumptions are largely mitigated by higher credit costs. Our TP rises slightly to MYR1.95, which includes a 2% ESG premium as per our in-house methodology. After a recent share price rally (+15% in the past month), we believe the stock is fairly valued at 1.48x P/BV, given that it is trading over +1SD from its 5-year mean, with RCE’s defensive attributes – particularly its resilient salary deduction scheme and prudent asset quality controls – already priced in. We downgrade the stock to NEUTRAL as a result.

• Key risks include higher-than-expected credit costs and weaker-than- expected financing growth. The converse, including favourable regulatory changes, present upside risks.

Source: RHB Research - 22 Nov 2022