Review

• Elk-Desa reported another robust set of results. 6M net profit surged YoY to RM29.1mn from RM9.7mn in 1HFY22 due to stronger revenue growth and writeback in impairment allowance. Elk-Desa’s results exceeded our expectations, with net profit accounting for 82% of our full-year forecast.  A single-tier interim dividend of 4.5 sen per share (2QFY22: 2.0 sen per share) has been declared.

• 6M revenue jumped by 37.0% YoY due to better contributions from both the hire purchase and furniture segments. Revenue in the furniture segment doubled to RM26.4mn from RM13.2mn a year ago. To recap, 1H  FY22 was adversely impacted by movement restrictions. Revenue from the hire purchase segment grew by 17.1% YoY. YTD, hire purchase receivables widened by some 11% to RM521mn as at 30 September 2022.

• Overall operating expenses expanded YoY due to higher staff costs and overall operating costs as the hire purchase portfolio also ballooned.  Despite that, the group’s 6M PBT surged to RM38.6mn vs RM13.2mn in  1HFY22. Elk-Desa’s cost-to-income ratio stood at 32% vs 27% a year ago.  The better-than-expected PBT was underpinned by a net writeback in impairment allowance amounting to RM3.3mn.

• Credit loss charge decreased from 1.01% to 0.32%. 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 an improvement in repayment trend. The net impaired loans ratio strengthened from 1.83% as at 30 June 2022 to 1.62% as at 30 September  2022.

• Elsewhere, the group’s bank borrowings increased by 37%, attributed to the higher drawdown of block discounting facilities to support the increase in hire purchase receivables. As such, Elk-Desa's gearing had risen slightly to 0.43x vs 0.33x in 1QFY23.

Impact

• Incorporating the better-than-expected 1HFY23 results, we raised Elk-Desa’s FY23/24/25 net profit forecast to RM43.1/44.9/45.6mn from  RM37.1/39.4/41.7mn previously. Our revision considers 1) stronger growth assumptions for hire purchase receivable and 2) further downward revision in the FY23 credit loss charge to 2.0% from 3.0%.

Outlook

• We expect the overall demand for used-car hire purchase financing to remain buoyant as economic activities remain healthy. 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 uphold the solid demand for quality and value-for-money furniture products. 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.

• Separately, Elk-Desa announced that it has proposed to undertake a bonus issue of 151.6mn new shares on the basis of 1 new share for every 2  existing Elk-Desa shares held. The proposed bonus issue is not expected to have any material effect on the earnings of the group. However, the group’s EPS is estimated to dilute by around 33% as a result of the increase in the number of shares in issue arising from this proposal. The proposal is subject to approvals being obtained and is expected to complete by  1Q2023.

Valuation

• We roll valuations forward to FY24. Tagging a 20% discount to Malaysia’s average NBFI (such as AEON Credit and RCE Capital) P/B ratio of 1.3x,  due to Elk-Desa’s smaller market cap, we raise the stock’s fair value to  RM1.66/share from 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, ii) normalisation in impairment charges and potential writebacks, iii) high-yielding HP book, iv) steady demand for furniture envisaged, and v) attractive dividend yields of around 6%.

Source: TA Research - 17 Nov 2022