• Keep NEUTRAL and MYR1.20 TP, 4% downside with c.5% FY24F (Mar) yield. ELK-Desa Resources’ 1QFY24 net profit of MYR8.5m missed expectations on the back of subdued hire purchase receivables (HPR) growth, higher impairment allowances, and a weak performance from the furniture segment. That said, we remain confident on the group’s HPR growth prospects and asset quality strategies, and look forward to a stronger performance in the coming quarters.

• A soft start to FY24. ELK recorded a net profit of MYR8.5m in 1QFY24, missing our and consensus estimates. The variance mainly came from higher-than-expected hire purchase impairment allowances, as (annualised) credit costs of 4.72% came in above its guidance of 3-4%. YoY, net profit halved in the absence of impairment allowance reversals, due to exceptional collection productivity in 1QFY23. QoQ, greater HP revenue (+2%) and opex savings (-10%) led to a bottomline growth of 14%.

• Flat HPR growth, although not alarming. ELK’s HPR as at 30 Jun stood at MYR574m (flat QoQ, +14% YoY). Management explained that this was mostly deliberate, as it was conservative with disbursements over the festive period to protect asset quality. The group reiterated its 10-15% HPR growth target for the year, which we deem to be achievable, given the continued strong demand for used cars.

• Uptick in impairments. The jump in credit costs in 1QFY24 was partly due to slower repayments during the quarter, likely due to the festive season. As a result, the net impaired loans ratio rose to 2.25% from 1.92% in 4QFY23. Net impaired loans should begin to trend downward once repossession activities get up to speed, ie around 2QFY23 onwards. Further out, the group will aim to improve its engagement with borrowers, while investments in digitalisation should assist borrowers in making more timely repayments.

• Disappointing quarter for the furniture segment. Furniture sales dropped 14% YoY (-11% QoQ), and fell short of our and management’s expectations. Coupled with higher staff costs, this led to a disappointing PBT of MYR1m for the furniture segment – the lowest level since 4QFY22. As 2Q tends to see seasonally softer sales, we expect to see downside risks to our forecasts, but note that the furniture segment only contributes 10% of group PBT (revenue: 34%).

• Forecasts and TP. We make no changes to our forecasts for now, pending the analysts’ briefing on 7 Sep 2023. However, we note the downside risks, given the underperformance in 1QFY24. Our unchanged TP MYR1.20 is based on a GGM-derived P/BV of 1.05x, with an ESG premium of 2% incorporated. While the counter’s current P/BV of 1.2x (+2SD from 5-year mean) appears high, we believe its popularity among dividend-seeking retail investors should continue to support its valuation at such levels.

Source: RHB Securities Research - 24 Aug 2023