• Maintain SELL and MYR2.30 TP, 26% downside. We recently hosted a meeting with RCE Capital’s senior management. We gather that long-term growth and asset quality catalysts could come in the form of favourable wage revisions for civil servants, but the short-term picture could be marred by accelerated repayments. At present, we still regard RCE’s valuation to be on the expensive end. Our TP includes a 0% ESG premium/discount.

• Strong receivables growth momentum… RCE’s receivables grew 6% YoY in 2QFY24 (Mar), ahead of the wider banking system’s 4% during the same period. Management attributes the solid growth to successful marketing initiatives, along with its speedy, hassle-free delivery of financing products to civil servants, which provides the group with a competitive edge over other financiers. No guidance for financing growth was provided, but management will continue to benchmark itself against the banking system (RHB forecast: c.4.5-5% YoY in CY24).

• …supported by potential long-term catalysts? The Government is due to revise civil servant wages in 2025 (see news report: Govt hints at civil servant salary increase next year). The short-term outlook post revision, based on historical trends, looks mixed. The last round of revisions in Mar 2012 (7-12% raise) were followed by two years of negative receivables growth for RCE, likely due to accelerated repayments. This trend could reoccur in the 2025 revision, and overshadow acquisitions of new customers. However, we are more optimistic over the longer term, as repayments ease off and the full effect of greater disposable incomes kicks in. Historical data shows that RCE was able to sustain receivables growth at high-single digit/low-double digits consistently over FY15-18.

• Regional peer comparison. Based on funds flow data obtained from Dibots, foreigners were active buyers of RCE shares over the past year. A quick look at consumer finance public-listed firms in Asia ex-China (Figure 1) could explain the increasing foreign interest on RCE, as its ROE and yields are much higher. For our valuation purposes, we continue to benchmark RCE against domestic peers.

• Share price analysis. RCE’s stellar share price performance in 2023 could be due to two factors: i) Its dividend policy revision to 60-80% (from 20- 40%); and ii) expectations of negative EPS growth for Aeon Credit (ACSM MK, BUY, TP: MYR7). On the latter, we see downside risk for RCE’s share price if ACSM’s digital bank chalks losses that are lower than expected.
  
  No changes to our forecasts and TP, but we revise our dividend payout assumption to 75% from 65%, in line with the 1H24 payout of 78%. Our stance on the counter remains – while we think its stable dividends and defensive attributes provide it with an edge vs (domestic) peers, RCE’s current valuation looks too pricey for entry.

Source: RHB Research - 12 Jan 2024