Review

• Elk-Desa reported yet another strong YoY results performance. 12M net  profit ballooned YoY to RM47.7mn from RM25.8mn a year ago due to  solid revenue growth, lower finance costs and writeback in impairment  allowance. Depite that, Elk-Desa’s results fell slightly short of our  expectations, with net profit accounting for 93% of our full-year forecast.  QoQ, the group’ net profit declined by 32.6% to RM7.5mn.

• A second single tier interim dividend of 3.5 sen per share was declared. In  addition to the first interim single tier interim dividend of 4.5 sen per share  (3.0 sen per share after restated for bonus issue), the total dividend for the  financial year would be 6.5 sen per share (FY22: 3.50 sen after restated for  bonus issue), representing a dividend pay out ratio of around 62%.

• 12M revenue jumped by 20.4% YoY due to better contributions from both  the hire purchase and furniture segments. 12M revenue in the furniture  segment surged to RM54.5mn from RM43.6mn a year ago. 4Q23 furniture  sales were lower by 3% YoY although the gross profit margin increased  from 31% in 4Q22 to 38% due to lower freight charges.

• Revenue from the hire purchase segment remained buoyant, rising 18%  YoY. 4Q23 hire purchase revenue also expanded by 22% YoY. The  increase was underpinned by hire purchase receivables, which widened by  some 23% YoY to RM575.1mn as of 31 March 2023.

• Overall operating expenses expanded YoY due to the increase in the hire  purchase segment which registered higher staff costs as the hire purchase  portfolio ballooned. This translates to a cost-to-income ratio of around  37%. The group’s 12M PBT surged to RM63.3mn vs. RM34.9mn in FY22.  The better-than-expected PBT was underpinned by an impairment  allowance of RM7.5mn, vs RM22.4mn a year ago.

• Credit loss charge decreased from 1.27% to 1.09%. Management noted  that this is due to a significant reduction in the non-performing accounts  YoY, which was underpinned by a recovery in activities and an  improvement in the repayment trend. However, on a QoQ basis, the  impairment allowance expanded by 90% due to slower higher repayment.  The net impaired loans ratio weakened to 1.92% as of 31 Mar 2023 from  1.28% as of 31 December 2022.

• Elsewhere, the group’s bank borrowings increased by 70%, 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 0.42x.

Impact

• Incorporating the FY23 results, we tweaked Elk-Desa’s FY24 and FY25 net  profit forecast to RM41.2mn and RM43.0mn from RM42.3mn and  RM43.3mn. We forecast FY26 net profit to accelerate by 6% to  RM45.5mn.

Outlook

• We expect the overall demand for used-car hire purchase financing to  remain buoyant. However, 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. The QoQ  increase in impairment allowances is inline with expectations that credit  charge trends is normalising. 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.

• 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.

Valuation

• Tagging a 15% discount to Malaysia’s average NBFI (such as AEON Credit  and RCE Capital) slightly higher P/B ratio of 1.35x (from 1.3x) due to Elk-Desa’s smaller market cap, we raise the stock’s fair value to RM1.23/share  from RM1.18/share. We maintain our HOLD recommendation on the  stock.

Source: TA Research - 23 May 2023