• Maintain NEUTRAL, with new MYR1.15 TP from MYR1.10, 6% downside. ELK-Desa Resources’ 1HFY25 (Mar) net profit missed expectations, largely due to higher-than-expected impairment allowances. We think 2H should pan out better HoH, given robust hire purchase (HP) receivables growth and seasonally strong furniture sales, although credit costs could remain high. However, we think the bright prospects are matched by the counter’s +1SD valuation, while yields also do not look too attractive at this juncture.

• Results review. ELK’s 2QFY25 net profit of MYR8.3m (-7% YoY, +1% QoQ) brought the 1HFY25 total to MYR16.4m (-5% YoY) – forming 42% of our and consensus full-year forecasts, which we deem to be a miss. Revenue growth was solid at 18% YoY driven by double-digit growth from the HP and furniture segments, while cost growth (+7%) was efficiently managed. As a result, PIOP of MYR42.9m was a 20% YoY increase. However, impairment allowances spiked 61% YoY, leading to the YoY decline in the bottomline. The group declared an interim DPS of 2 sen (55% payout) – while this came up short against our forecast of 5 sen, we expect the group to lift its payout in 4Q, as per historical trends.

• HP segment seeing continued growth. ELK’s HP receivables grew 18% YoY (+4% QoQ), ahead of management’s guidance of 10-15%. Management thinks that demand for used car financing should remain robust, and the group is willing to gear up further (to levels above 1x, vs current 0.6x) to meet such demand. On the other hand, asset quality continues to be under pressure – 2Q/1H credit costs of 6.2% are trending ahead of management’s 3.75-4% target for the year. We understand that this was partly due to losses on sales of repossessed cars – recall that due to the repossession ban during the pandemic period, ELK now has an abnormally large inventory of repossessed cars. While the 3.75-4% target is likely to be missed this year, the gradual clearing out of its repo inventory (to be completed by end-FY25) could allow for credit costs to stabilise from FY26F onwards.

• Furniture segment to experience seasonal boost in 2H? The furniture segment has performed decently YTD, with revenue and PBT up 23% and 26% YoY in 1HFY25. We learnt that part of the reason for the strong performance is due to the group’s expansion in East Malaysia, which has yielded strong sales. We think the strong performance from the furniture segment will likely continue, especially as the segment tends to record greater sales – and consequently, profitability – in 2H, given seasonal factors.

• Forecasts and TP. We raise our HP receivables growth forecasts in tandem with the strong YTD number, though this is mitigated by more conservative credit cost assumptions. All in, our FY25F is cut by 11%, but FY26F-27F are lifted by 5% and 7%. Our TP is consequently raised to MYR1.15, and includes an unchanged 2% ESG premium. 

Source: RHB Securities Research - 14 Nov 2024