• Keep NEUTRAL and MYR1.20 TP, 6% downside with 5% FY24F (Mar) yield. We recently hosted ELK-Desa Resources in a showcase event for retail investors and came away from the session feeling positive on the group’s hire purchase receivables (HPR) growth prospects and asset quality strategies. Despite this, earnings growth is likely to be negative in FY24F due to a normalisation of credit cost, though yields still look decent at c.5%.

• No let down in HPR growth. In FY23, HPR grew 23% YoY against an initial guidance of 10%. For FY24F, management aims to continue growing HPR at double-digits, with a 10-15% target provided. We expect demand for used car financing to stay robust – partly thanks to higher transaction volumes on used cars driven by online trading platforms – and this should support ELK’s growth ambitions moving forward.

• Repossession to improve asset quality indicators. ELK’s GIL ratio stood at 7.4% at end-Mar 2023, down from 9.9% the year before. This is attributable to better collection productivity, especially in 1HFY23. In FY24F, the group will re-engage in repossession activities after a multi-year pause to aid in debt recovery – the group is generally able to recover 50% of the asset value upon auction. Impaired accounts can then be written off post- repossession, which should allow the group to significantly lower its GIL ratio. Credit cost guidance is for 3-4% pa which is at pre-COVID 19 levels.

• Expanding furniture business in East Malaysia. A key initiative in FY24F is to increase its home furniture wholesaling presence in Sabah and Sarawak. Since currently no major wholesaler operates in the two states, management believes there is market share to be captured. As we understand, gross profit margin for sales in East Malaysia should not differ too much from that in West Malaysia, ie 33-37%.

• Unlikely to be another record year. FY23 record-high net profit of MYR48m is unlikely to be matched in FY24, as the group benefitted from a one-off surge in repayments in 1HFY23 (leading to impairment allowance reversals). Should the group meet its HPR growth target of 10-15% and keep credit costs at 3-4%, FY24F should land slightly shy of the FY23 level.

• We lower FY24-26F by 8-10% in line with expectations for softer net profit YoY. Our TP is maintained at MYR1.20, as we lowered our cost of equity assumption to 9% from 10% due to improved visibility on credit costs and clear asset quality strategies. Our TP includes a 2% ESG premium based on our in-house ESG scoring methodology. We believe ELK’s popularity among dividend-seeking retail investors should continue to keep its lofty valuation at current levels (over +2SD above 5-year mean P/BV).

• Key downside risks include weaker-than-expected HPR growth and higher-than-expected credit costs. The converse presents upside risks.

Source: RHB Research - 7 Aug 2023