Review

• Elk-Desa reported FY22 results, which came within expectations. As expected, net profit declined by around 27% YoY to RM25.8mn from RM35.3mn a year ago. Despite the softer performance, Elk-Desa’s net profit came within our expectations, with net profit accounting for 99.3% of our full-year forecast.

• A second single-tier interim dividend of 3.25 sen per share has been proposed. Combined with the first single-tier interim dividend of 2.00 sen per share, the total dividend for the FY stood at 5.25 sen per share. This represents a dividend payout ratio of around 61%, higher than the dividend policy of 60%.

• As expected, 12M revenue fell by 10.3% YoY due to disruptions to the group’s business and operations during the MCO from June to September 2021, as well as lower overall furniture sales. QoQ revenue declined by close to 6% due to a smaller hire purchase portfolio.

• Hire purchase receivables fell by 10% to RM468.1mn as at 31 March 2022, from RM522.8mn a year ago. The decline is in tandem with the group’s cautious stance to preserve asset quality instead of driving receivables growth.

• Meanwhile, the group’s 12M PBT declined by 24.2% YoY, exacerbated by a higher impairment allowance (+19.8% YoY). The credit loss charge climbed to 4.13% from 3.15% a year ago, underpinned by an increase in impaired loan accounts during the year, which was largely caused by the disruptions of the hirers’ repayment patterns amidst the movement restrictions and lockdowns imposed during the FY.

• Elsewhere, the finance costs decreased by 26.5% YoY on the back of the group's concerted effort to pare down its borrowings during the FY. Elk Desa's gearing remains at a low level of 0.26x.

Impact

• Incorporating FY22 results, we tweaked Elk Desa’s FY23/24 net profit forecast to RM27.8/31.2mn from RM29.5/32.5mn previously. We forecast stronger net profit growth of 14% YoY to RM35.7mn in FY25 as we assume 1) more robust HP receivables growth of 12% and 2) improving impairment allowances.

Outlook

• With the domestic economy expected to remain on its recovery path, management expects the overall demand for used-car hire purchase financing to accelerate. The rise in online trading platforms for used cars is also envisaged to contribute towards a slower price reduction rate for older used cars. Other catalysts driving demand for used cars include the introduction of a higher minimum wage rate of RM1500 may be positive for the industry. With that, ELK-Desa aims to gradually bring its hire purchase receivables portfolio towards pre-pandemic levels.

• However, management is aware of potential downside risks such as rising living costs and the expiration of loan moratoriums, affecting borrowers' disposable incomes and ability to repay. Furthermore, the Covid-19 Act continues to limit the group's debt collection efforts.

• Elsewhere, management expects improving business and consumer sentiments to stimulate demand for quality and value-for-money furniture products in the furniture market. In line with plans to increase its footprint in the domestic home furniture wholesale market, ELK-Desa will be working closely with furniture dealers and manufacturers to find the perfect furniture products for the Malaysian consumers.

Valuation

• Tagging 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 maintain a Buy recommendation on Elk-Desa 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 4.5-5.5%.

Source: TA Research - 23 May 2022