Yesterday, we attended Elk-Desa’s virtual briefing, held in conjunction with the release of the company’s 1QFY23 results. We fine-tuned the following assumptions following the meeting with management yesterday.

5-10% growth in HP receivables

HP receivables grew 7.3% QoQ. However, management maintained its guidance for an increase of 5-10% in FY23, suggesting ongoing cautiousness around inflationary pressures, rising policy rates and possible extension of the Covid-19 Act to protect the borrowers. Hence, although the intention is to gradually increase the HP receivables portfolio back to pre-Covid levels, management remains mindful of the potential asset quality risk due to ongoing macro headwinds. As such, with management's guidance, we toned down our HP receivable growth assumptions from 12% to 8/10/12% for FY23/24/25.

Lower impairment in 1Q may not be sustainable

To recap, 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 more robust revenue growth and writeback in impairment allowance. Management explained that the impairment reversal was due to outstanding collection during the period. However, management added that the likelihood of further reversing impairment is remote and that collection should normalise in the coming quarters. As such, we readjusted our credit loss charge to more conservative assumptions of 3.5/3.0/2.8% for FY23/24/25.

Lean balance sheet

We believe the group's lean balance sheet will buffer them from rising interest rates. In the 1QFY23 results, the group's balance sheet strengthened as bank borrowings fell by 11%, mainly due to the 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.

Solid demand for the furniture business

Elk-Desa’s 3M revenue from the furniture segment surged by 70% YoY due to the solid demand for furniture and the low base effect due to MCO disruptions last year. Management foresees the furniture business to continue benefitting from the improvement in consumer sentiments. Strategies to capture the rising demand include working closely with furniture dealers to identify products that would appeal to the consumers, optimising its capabilities in stock and logistics management, and expanding the current warehouse capacity.

Impact

Taken together, we adjusted Elk-Desa’s FY23/24/25 net profit forecast to RM35.5/39.4/40.8mn from RM37.1/39.4/41.7mn.

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 - 2 Sept 2022