Review

• Elk-Desa reported softer YoY results, with 1HFY24 net profit falling by 40% YoY to RM17.3mn, underpinned by an impairment allowance of RM12.9mn YTD. Despite that, Elk-Desa's results came within our expectations, with net profit accounting for 47% of our full-year forecast. A single-tier interim dividend of 2.0 sen per share (2QFY23: 4.5 sen per share) has been declared.

• QoQ, the group’s net profit improved by 14.4% due to a decline in a softer impairment allowance of RM5.8mn vs RM7.1mn in 1Q. However, this sequential improvement was muted by a 17.4% increase in finance costs.

• YoY, the 6M revenue grew by 4.5% due to better contributions from the hire purchase segments (+11% YoY), which helped to cushion the decline reported in the furniture segment (-8% YoY). The furniture segment's gross profit margin also narrowed from 42% to 35%, which is attributed to an increase in the purchase cost of imported goods due to the weak MYR and intense competition squeezing margins.

• 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 13% YoY to RM588.8mn as of 30 September 2023.

• Operating expenses expanded YoY due to higher operating and staff costs. This translates to a cost-to-income ratio of around 30%. The HP segment’s 6M PBT, however, fell by 39% YoY to RM21.9mn vs RM36.1mn in 1HFY23, attributed to an impairment allowance vs a reversal recorded a year ago.

• The credit loss charge increased to 2.17% compared to a reversal of the credit loss charge of 0.66% last year. Management attributes the higher impairment allowance of RM12.9mn to slower repayment from hirers and higher losses incurred from selling repossessed vehicles. However, given the increase in the level of repossession activities in 2Q, the net impaired loans ratio improved to 0.96% from 1.92% as of 31 March 2023.

• Within expectations, the group’s bank borrowings increased by 23%, attributed to the higher drawdown of block discounting facilities to support the increase in hire purchase receivables. With that, Elk-Desa's gearing levels have also risen to 0.52x vs 0.43x last year.

Impact

• No change to our earnings estimates.

Outlook

• Overall demand for used-car hire purchase financing remained robust as ELK-Desa raises 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. Nevertheless, 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 looking to sustain 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

• Using P/B ratio of 1.6x, after tagging a 20% discount to Malaysia’s average NBFI (such as AEON Credit and RCE Capital) due to Elk-Desa’s smaller market cap, we adjust the stock’s fair value to RM1.37/share. Given that the risk-reward potential has widened, we upgraded our recommendation on the stock from sell to HOLD.

Source: TA Research - 17 Nov 2023