Review

• Elk-Desa reported a robust set of 1QFY23 results. 3M net profit more than tripled QoQ and YoY to RM17.6mn from RM5.5mn in 4QFY22 and RM5.0mn a year ago due to stronger revenue growth and writeback in impairment allowance. With that, Elk-Desa’s results exceeded our expectations, with net profit accounting for 63% of our full-year forecast.

• 3M revenue increased by 24.2% YoY (+8.3% QoQ) due to better contributions from both the hire purchase and furniture segments. Revenue in the furniture segment surged by some 70% YoY due to softer sales in 1QFY22 as the MCO disruptions adversely impacted sales a year ago. Revenue from the hire purchase segment grew by 7% YoY. YTD, hire purchase receivables widened by 7% to RM502mn as at 30 June 2022.

• Although the overall operating expenses also expanded YoY due to higher staff costs and overall operating costs, the group’s 3M PBT surged to RM23.4mn vs. RM6.9mn in 1QFY22. Elk-Desa’s cost-to-income ratio stood at 28%. The better-than-expected PBT was underpinned by a writeback in impairment allowance amounting to RM5.3mn. Management noted that this is due to a significant decrease in the non-performing accounts during the quarter, which was underpinned by a recovery in activities and a strong collection trend. The net impaired loans ratio improved from 2.89% as at 31 March 2022 to 1.83% as at 30 June 2022.

• Elsewhere, the group’s balance sheet strengthened as bank borrowings fell by 11%, mainly due to repayment of block discounting facilities and term loans. As a result, the finance costs decreased by 42.4% YoY on the back of the group's concerted effort to pare down its borrowings. Elk-Desa's gearing remains at a low level of 0.33x.

Impact

• Incorporating the better-than-expected 1QFY23 results, we raised Elk-Desa’s FY23/24/25 net profit forecast to RM37.1/39.4/41.7mn from RM27.8/31.2/35.7mn previously. Our revision considers, 1) stronger growth assumptions for furniture sales and 2) downward revision in the FY23 credit loss charge to 3.0% from 3.5%.

Outlook

• With the domestic economy expected to remain on its recovery path, we expect the overall demand for used-car hire purchase financing to accelerate as ELK-Desa aims to bring its hire purchase receivables portfolio towards pre-pandemic levels gradually. Other catalysts driving demand for used cars include the introduction of a higher minimum wage rate of RM1500 may be positive for the industry. However, we note that potential downside risks such as rising living costs due to the increased inflationary pressures and rising interest rates could affect borrowers' disposable incomes and ability to repay.

• Elsewhere, better business and consumer sentiments should help 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 continue to work closely with furniture dealers and manufacturers to find the perfect furniture products for 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, we maintain our 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, normalisation in impairment charges and potential writebacks, ii) high yielding HP book, iii) steady demand for furniture envisaged, and iv) attractive dividend yields of around 4.0-5.0%.

Source: TA Research - 22 Aug 2022