We initiate coverage on Elk-Desa Resources Berhad with a Buy recommendation. We tag a 30% discount to Malaysia’s average non-banking financial institution (NBFI) P/B ratio of 1.4x, due to Elk-Desa’s smaller market cap and less superior ROE, to FY23e BV, thus arriving at a fair value of RM1.50/share. This represents a potential total return of 18.3%, including a 4.7% estimated dividend yield.

Investment Merits

1. Recovery prospect from more robust hire purchase (HP) receivables and normalisation in impairment charges

2. High yielding HP book;

3. Steady demand for furniture envisaged; and

4. Attractive Dividend Yield.

Earnings Forecast

Elk-Desa is expected to have a softer FY22, owing to the pandemic's several phases of Movement Control Order. However, we expect accelerating hire purchase receivables growth of 8-12% in FY23/24, as demand rises due to a more favourable external environment. Meanwhile, we expect a greater impairment charge of 3.8% in FY22, which is in line with management's projection of 3-4 %. Nonetheless, we estimate impairment charges will steadily improve, reaching 3.0% and 2.5% in FY23 and FY24, respectively. Demand for furniture products is expected to stay strong, expanding at a steady 6% each year. Elk-Desa's net profit is expected to fall by 26% YoY to RM26.0mn in FY22, before rebounding by 14% and 10% to RM29.5mn and RM32.5mn in FY23 and FY24, respectively.

Valuation

We tag a 30% discount to Malaysia’s average NBFI (such as AEON Credit and RCE Capital) P/B ratio of 1.4x, due to Elk-Desa’s smaller market cap and less superior ROE, to FY23e BV, thus arriving at a fair value of RM1.50/share. We initiate coverage on Elk-Desa with a Buy recommendation premised on i) strong earnings recovery in FY23 on the back of more robust HP receivables and normalisation in impairment charges, ii) high yielding HP book, iii) steady demand for furniture envisaged, and iv) attractive dividend yields of around 4.5- 5.0%.

Source: TA Research - 19 May 2022