Review

• Elk-Desa reported softer YoY results with 1QFY24 net profit falling by 52% YoY to RM8.5mn, underpinned by an impairment allowance of RM7.1mn YTD. Despite that, Elk-Desa’s results came within our expectations, with net profit accounting for 21% of our full-year forecast.

• QoQ, the group’s net profit improved by 13.4% due to a decline in the cost of inventories sold and other expenses. However, this sequential improvement was muted by a 2.8% decline in revenue and a 1.3% increase in finance costs.

• YoY, the 3M revenue grew by 0.6% due to better contributions from the hire purchase segments (+8.9% YoY), which helped to cushion the decline reported in the furniture segment (-14.1% YoY). Although the sale of furniture declined, the segment’s gross profit margin increased from 36% in 1QFY23 to 37% in 1QFY24 due to lower freight charges.

• YoY revenue from the hire purchase segment remained buoyant due to an increase in the hire purchase portfolio. According to management, the hire purchase receivables widened by some 14% YoY to RM574.7mn as of 30 June 2023.

• Overall operating expenses expanded YoY due to higher operating and staff costs. This translates to a cost-to-income ratio of around 29%. The segment’s 3M PBT, however, fell by almost half to RM12.7mn vs RM23.6mn in 1QFY23, attributed to an impairment allowance vs a reversal of RM5.3mn recorded a year ago.

• As such, the credit loss charge increased to 1.18% compared to a reversal of the credit loss charge of 1.01% last year. To recap, management noted that the reversal was underpinned by a recovery in activities and an improvement in the repayment trend, thus leading to a significant reduction in the non-performing accounts. With that, the net impaired loans ratio deteriorated to 2.25% as of 30 June 2023 from 1.92% as of 31 March 2023.

• Within expectations, the group’s bank borrowings increased by 59%, attributed to the higher drawdown of block discounting facilities to support the increase in hire purchase receivables. With that, Elk-Desa's gearing levels has also risen to 0.52x vs 0.33x a year ago.

Impact

• No change to our earnings estimates.

Outlook

• Although we anticipate that the overall demand for used-car hire purchase financing will remain robust, the strong growth experienced in FY23 has moderated. Nevertheless, ELK-Desa is committed to gradually increasing its hire purchase receivables portfolio to pre-pandemic levels.

• The YoY increase in impairment allowances aligns with our expectations that credit charge trends are returning to normal. Management remains vigilant regarding potential downside risks, including the rising cost of living and constrained disposable incomes, particularly within the M40 and B40 segments, which could impact borrowers' ability to meet their obligations.

• In the furniture segment, ELK-Desa is intent on sustaining organic growth through the domestic wholesale market. Currently, the company distributes its furniture products to over 800 furniture retailers across Malaysia, emphasising Sabah and Sarawak. Additionally, the group is actively seeking higher-quality yet affordable furniture options to address potential constraints on consumers' disposable incomes.

Valuation

• Tagging a 15% discount to Malaysia’s average NBFI (such as AEON Credit and RCE Capital) P/B ratio of 1.35x due to Elk-Desa’s smaller market cap, we maintain the stock’s fair value at RM1.23/share. Given that the riskreward potential has narrowed, we downgrade our recommendation on the stock from hold to SELL.

Source: TA Research - 24 Aug 2023