Review

• Elk-Desa reported a 23.2% decline in FY24 net profit to RM36.7mn. The weaker YoY results are due to an increase in the impairment allowance, which rose to RM26.7mn vs RM7.5mn a year ago. Despite that, Elk-Desa's results came within our expectations, with the PBT accounting for 100% of our full-year forecast.

• A second single-tier interim dividend of 3.0 sen per share was declared. In addition to the first interim single-tier interim dividend of 2.0 sen per share, the total dividend for the financial year would be 5.0 sen per share (FY23: 6.50 sen), representing a dividend payout ratio of around 60%.

• QoQ, the group’s net profit continued to show improving trends, with net profit rising by 1.0%, anchored by stronger revenue growth of 9.0%. However, the better sequential topline performance was muted by higher impairment allowance (+16.0% QoQ), expenses (+1.1% QoQ) and a 13.6% increase in finance costs.

• YoY, the FY24 revenue grew by 8.1% due to better contributions from the hire purchase segment (+12% YoY), which helped to cushion the flattish performance in the furniture segment. The furniture segment's gross profit margin also narrowed further from 38% to 32% in 4QFY24, attributed to an increase in the purchase cost of imported goods due to the weak MYR, write down of inventory cost 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 12% YoY to RM641.8mn as of 31 March 2024. Despite that, the HP segment’s 12M PBT fell by 13% YoY to RM58.2mn from RM66.6mn a year ago, attributed to an increase in the impairment allowance.

• In FY24, the credit loss charge increased to 1.11% from 1.09%. Management attributes the higher impairment allowance to higher losses incurred from selling repossessed vehicles. However, given the increase in the level of repossession activities throughout the FY, the net impaired loans ratio improved to 0.56% from 0.58% as of 31 December 2023.

• Overall operating expenses expanded YoY due to higher selling, distribution and staff costs from both the HP and furniture segments. The cost-to-income ratio stood little changed at around 30% (FY23: 31%).

• Within expectations, the group’s bank borrowings increased by 51% YoY, 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 0.62x vs 0.42x last year.

Impact

• Incorporating FY24 results, we tweak the FY25/26 net profit forecasts to RM41.1/42.2mn from RM38.7/41.1mn previously. We project stronger FY27 net profit growth of 5% to RM44.5mn.

Outlook

• Overall demand for used-car hire purchase financing remained robust. The YoY increase in impairment allowances aligns with our expectations that credit charge trends will return 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. Management intends to further reduce the impaired loan ratio by proactively engaging with the customers and ramping up recovery efforts.

• 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 maintain Elk-Desa’s TP at RM1.35/share. Our valuation is based on a 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. However, given that the risk-reward potential has narrowed due to the recent increase in the share price, we downgrade Elk-Desa to SELL from hold.

Source: TA Research - 24 May 2024