• Keep SELL and MYR1.05 TP, 13% downside. ELK-Desa Resources’ 9MFY24 (Mar) results are in line with our and Street full-year estimates, especially since 4Q tends to be a seasonally strong quarter for the group. Key results highlights were sustained hire purchase (HP) receivables growth, a continued reduction in the net impaired loans ratio, and a sequential rebound in the furniture segment’s numbers. Our SELL call is premised on valuation grounds.

• Results review. 3QFY24 net profit of MYR9.6m (-14% YoY, +9% QoQ) brought the 9MFY24 total to MYR26.9m (-33% YoY). On a cumulative basis, total revenue grew 5% YoY, aided by stronger contributions from the HP segment, albeit dragged down by a muted furniture division. Opex rose 10% on greater staff cost, but CIR remains at a manageable 30% (9MFY23: 29%). Overall, its 9MFY24 net profit forms 70% and 73% of our and the Street’s estimates. Note that normally, 70% would be deemed as a miss, but we consider this to be in line, in view of a robust 4QFY23 due to the festive Lunar New Year period.

• Growth momentum maintained. ELK’s HP receivables increased 10% YoY (QoQ: +5%), bringing the receivables book to its highest ever level of MYR616m. Management believes the growth momentum can be sustained, especially as the strong new car sales over the past two years start filtering through to the used car market. To recap, the group has a growth target of at least 10% YoY for FY24. As for funding, management sees further room to lever up (to gearing levels of 1-1.5x from 0.45x currently), but it believes a c.10% YoY growth rate strikes a good balance between growth and asset quality, given the current market conditions.

• Higher impairment allowances are not surprising. We do not note any significant deterioration in the group’s asset quality. In fact, ELK’s net impaired loans ratio decreased to 0.58% as at Dec 2023 (Mar 2023: 1.92%) as a result of repossession activities. We understand that repossession costs are recorded under impairment allowances, which would partly explain the higher YoY impairment allowances (recall that the group only resumed repossession activities in FY24).

• Sequential rebound in the furniture segment. The furniture segment underwent a rebound in 3Q, with revenue rising 17% QoQ (YoY: -2%) and segmental PBT back up to the MYR1m level (2QFY24: MYR0.1m). We anticipate another decent quarter in 4Q, due to seasonal factors. However, management has flagged a continued tightening of customers’ disposable incomes as a key risk for segmental revenue and earnings.

• Forecasts and TP maintained. Our MYR1.05 TP includes a 2% ESG premium. We maintain our SELL call on valuation grounds (1.1x P/BV vs 8-9% ROE looks rather stretched), but note that its dividend yields of c.5% look decent.

Source: RHB Research - 23 Feb 2024