• Upgrade to NEUTRAL from Sell, new MYR1.10 TP from MYR1.05, c.5% FY25F (Mar) yield. ELK-Desa Resources’ 1QFY25 results missed on the back of higher-than-expected credit costs, which we think was partly influenced by seasonal factors. With its strong receivables growth momentum, and potential benefits from the civil service wage revision and stronger MYR, things could be heading in the right direction for the group. However, we think that at 1.1x P/BV vs c.9% ROE, the current valuation looks rather pricey for entry.

• Results review. ELK’s 1QFY25 net profit of MYR8.1m (-4% YoY, -16% QoQ) came up short against expectations, forming 20% of our and consensus’ full- year estimates. The key deviation from our numbers mainly came from higher-than-expected impairment allowances (+40% YoY, +33% QoQ). YoY, PIOP was a strong +15% YoY, after a decent 17% growth in revenue (stronger contributions from both operating segments) and positive JAWs from good cost controls (opex +13% YoY). However, PIOP growth was a more muted 2% on a QoQ basis, as revenue growth was negative off a high base. All in, 1QFY25 ROE stood at 6.8% (1QFY24: 7.3%, 4QFY24: 8.1%).

• Receivables growth momentum is still strong. Management aims to keep hire purchase receivables growth at 10-15% YoY in FY25. We think this is possible given the group’s track record and appetite, while the impending revision to civil servants’ salaries could also provide a boost to growth, though civil servants currently form a small portion of the group’s receivables book. Net gearing remains at a low 0.5x, and management is willing to gear up further to the lower end of its peers’ 1.6-3.2x range to support growth.

• Higher credit costs. 1QFY25 credit costs of 5.7% was above management’s expectations – we think this could be partly seasonal, and to a certain extent, a consequence of the strong receivables growth during the quarter. Nevertheless, management aims to keep credit costs at 3.75-4% in FY25. On a more positive note, the net impaired loans ratio continued on its downtrend, landing at 0.52% in 1QFY25 (4QFY24: 0.56%, 1QFY24: 2.25%).

• Furniture segment – growing eastwards. The furniture segment recorded revenue of MYR15.2m, up 22% YoY (-8% QoQ off a record-high base). We gather that the group has been gaining traction in East Malaysia – in line with its strategic focus. It also notes that inventory costs are on the rise, but the recent strengthening of the MYR should allow it to maintain gross margins at 35-36% (c.30% of inventory is purchased in USD terms).

• FY25/26/27F forecasts lowered by 5%/4%/1% as we factor in higher credit cost assumptions. However, we raise our TP to MYR1.10 from MYR1.05 after rolling forward our valuation year to CY25 and updating our cost of equity for the latest house macros. Our TP includes a 2% ESG premium.

Source: RHB Research - 16 Aug 2024