Review

• Elk-Desa reported yet another strong results performance. 9M net profit doubled YoY to RM40.2mn from RM20.2mn a year ago due to solid revenue growth and writeback in impairment allowance. Elk-Desa’s results exceeded our expectations, with net profit accounting for 93% of our full-year forecast.

• 9M revenue jumped by 24% YoY due to better contributions from both the hire purchase and furniture segments. Revenue in the furniture segment surged to RM40.4mn from RM29.1mn a year ago. To recap, 9M  FY22 was adversely impacted by movement restrictions. Revenue from the hire purchase segment grew by 17% YoY. Hire purchase receivables widened by some 19% YoY to RM560.3mn as of 31 December 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 9M PBT surged to RM53.4mn vs. RM27.4mn in 9MFY22. Elk-Desa’s cost-to-income ratio stood at a manageable level of  29%. The better-than-expected PBT was underpinned by an impairment allowance of RM0.5mn, vs RM15.8mn a year ago.

• Credit loss charge decreased from 2.92% to 0.04%. Management noted that this is due to a significant reduction in the non-performing accounts  YTD, which was underpinned by a recovery in activities and an improvement in the repayment trend. The net impaired loans ratio strengthened to 1.58% as of 31 December 2022 from 2.89% as of 31  March 2022.

• Elsewhere, the group’s bank borrowings increased by 52%, attributed to the higher drawdown of block discounting facilities to support the increase in hire purchase receivables. Despite that, Elk-Desa's gearing levels remain manageable at 0.43x.

Impact

• Incorporating the better-than-expected 9MFY23 results, we raised ElkDesa’s FY23 net profit forecast to RM51.1mn from RM43.1mn on further downward revision in the credit loss charge to 0% from 2.0%. FY24/25 net profit forecasts are maintained at RM45.0/45.8mn.

Outlook

• We expect the overall demand for used-car hire purchase financing to remain buoyant as economic activities remain healthy. As ELK-Desa focuses on steadily raising the hire purchase receivables portfolio towards pre-pandemic levels, management remains cautious of the ongoing challenging macro environment. While the hire purchase segment was also largely driven by a reversal of impairment allowance, management expects credit charge trends to normalise. We continue to 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. In the meantime, efforts are being made to optimise stock and logistics management capabilities, including managing potential supply chain bottlenecks resulting from logistics interruptions, to ensure the timely delivery of customer orders.

• Separately, Elk-Desa announced that the ex and entitlement dates for the  Bonus Issue would be on 17 and 20 March 2023. To recap, the company had 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% due to the increase in the number of shares in issues arising from this proposal.

Valuation

• Tagging a lower 15% (from 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 RM1.80/share from  RM1.66/share. Elk-Desa’s share price has risen sharply since we initiated coverage on the stock. However, the stock's risk-reward potential has narrowed, given the substantial increase. As such, we downgrade our recommendation on the stock to HOLD from buy.

Source: TA Research - 17 Feb 2023