• Maintain SELL, new MYR1.25 TP from MYR1.35 (ex-bonus issue adjustments), 28% downside. RCE Capital’s 1HFY25 (Mar) results missed expectations on the back of lower-than-expected financing growth. While the revision to civil servants’ salaries points towards a rosier outlook in FY26, we think the current >+2SD P/BV is still unjustified. As such, we maintain our SELL rating on valuation grounds.

• Results review. RCE’s 2QFY25 net profit of MYR27.8m (-8% QoQ, -27% YoY) brought the 1HFY25 figure to MYR58.2m (-23% YoY) – this formed 37% and 39% of our and consensus’ full-year estimates. The main drag on earnings came from lower-than-expected non-II (due to softer-thanexpected financing growth), which led to a 9% YoY drop in total operating income. 2QFY25 opex also rose by a sharp 46% QoQ (YoY: +37%) due to the annual issuance of shares to staff under the group’s employees’ share scheme – this amounted to an additional MYR5.2m in staff costs during the quarter. All in, 1HFY25 ROE stood at 14.2% (1HFY24: 17.7%). The group announced an interim DPS of 3 sen (76% payout), down from the 1HFY24 interim DPS of 4 sen (78% payout, adjusted for bonus issue).

• Still in a tough operating environment… RCE’s gross financing receivables shrank by 1% QoQ (YoY: -1%) in 2QFY25. This comes to us as no surprise, as management had guided that the operating environment for civil servant financing has been challenging over the past year – the group is seeing an influx of lower credit score applicants, and has had to pare down disbursements to maintain its asset quality. Positively, however, we are beginning to see credit costs moderate back to c.1.2% per quarter, compared to the 1.5-2.0% range over the past three quarters.

• … but hopeful of better days ahead. According to management, the nearterm trajectory for financing growth still looks mixed, but it is hopeful of growth beyond that, especially with the increment to civil servants’ salaries effective Dec 2024 (ie the tail end of RCE’s 3QFY25). Should this be the case, we think earnings can meaningfully pick up in FY26 onwards, especially if credit costs can be kept in check.

• Forecasts. Given the soft 1HFY25, we cut FY25 earnings by 14%, mostly from lower financing growth and non-financing income assumptions. However, our FY26-27F earnings are cut by a softer 3%, as we expect nonfinancing income to pick up in tandem with disbursements.

• Our TP drops to MYR1.25 (from MYR1.35) post-adjustments to our earnings forecasts, and includes an unchanged 0% ESG premium. Despite expectations of a better FY26, we think that RCE’s current P/BV of 2.8x (over +2SD) is running well ahead of the company’s fundamentals – which justifies our unchanged SELL rating on the counter.

Source: RHB Securities Research - 21 Nov 2024