Review

• Elk-Desa reported another set of softer YoY performance, with 9MFY24 net profit falling by 33% YoY to RM27.0mn. The weaker YoY results are due to an increase in the impairment allowance to RM19.3mn YTD, vs RM0.5mn a year ago. Despite that, Elk-Desa's results came within our expectations, with net profit accounting for 72% of our full-year forecast.

• QoQ, the group’s net profit improved by 8.7%, anchored by stronger revenue growth of 9.1%. However, the better sequential topline performance was muted by higher impairement allowance (+9.6% QoQ), expenses (+4.9% QoQ) and a 1.9% increase in finance costs.

• YoY, the 9M revenue grew by 5% due to better contributions from the hire purchase segment (+12% YoY), which helped to cushion the decline reported in the furniture segment (-6% YoY). The furniture segment's gross profit margin also narrowed further from 36% to 35% in 3QFY24, 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 10% YoY to RM616.1mn as of 31 December 2023.

• Operating expenses expanded YoY due to higher operating and staff costs. This translated to a cost-to-income ratio of around 30%. The HP segment’s 9M PBT, however, fell by 31% YoY to RM33.9mn from RM49.4mn in 9MFY23, attributed to an increase in the impairment allowance.

• During the quarter, the credit loss charge increased to 0.97% from 0.64% in 2Q. Management attributes the higher impairment allowance to slower repayment from hirers and higher losses incurred from selling repossessed vehicles. However, given the increase in the level of repossession activities in 3Q, the net impaired loans ratio improved to 0.58% from 0.96% as of 30 September 2023.

• Within expectations, the group’s bank borrowings increased by 22%, attributed to the higher drawdown of block discounting facilities to support the increase in hire purchase receivables. With that, Elk-Desa's gearing levels rose to 0.56x 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 continues to remain 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. Management intends to focus on further reducing the impaired loans ratio.
   
• 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

• We lower Elk-Desa’s TP to RM1.28/share from RM1.37/share, after tagging a wider 25% discount to Malaysia’s average NBFI (such as AEON Credit and RCE Capital) P/B ratio of 1.6x due to Elk-Desa’s smaller market cap and less superior ROEs. We maintain a HOLD recommendation on the stock.

Source: TA Research - 23 Feb 2024