Review

• Elk-Desa reported a 4.3% decline in 1QFY25 net profit to RM8.1mn. The weaker YoY results are due to an increase in the impairment allowance, which rose to RM9.8mn vs RM7.1mn a year ago. With that, Elk-Desa's results came at the lower end of our estimates, with the PBT accounting for 20% of our full-year forecast. The slight variance was due to a higherthan-expected impairment allowance.

• QoQ, the group’s net profit slipped by 16.2% on the back of a 1.6% QoQ decline in revenue, along with a 39.5% rise in impairment allowance, higher expenses (+5.6% QoQ) and finance costs (+7.7% QoQ).

• YoY, the 1QFY25 revenue grew by 17.1% due to better contributions from both the hire purchase and furniture segments. Revenue in the furniture segment rose by 22% YoY, attributed to higher demand from the domestic wholesale market in East Malaysia. The increase is in line with management's efforts to penetrate the markets in Sabah and Sarawak. Despite that, the segment's gross profit margin narrowed from 37% to 36% in 1QFY25, attributed to higher selling and distribution costs resulting from higher shipping costs to East Malaysia. However, management also noted that the impairment allowance for the segment climbed by 151% to RM0.14mn owing to slower repayment from furniture dealers this quarter.

• YoY revenue from the hire purchase segment grew by 15% YoY. The hire purchase receivables widened by some 4% QoQ to RM668.3mn as of 30 June 2024. The HP segment’s 3M PBT slipped by 1% YoY to RM10.0mn from RM10.1mn a year ago, attributed to an increase in the impairment allowance.

• In 1QFY25, the credit loss charge increased to 1.43% from 1.18%. Management attributes the higher impairment allowance to slower hirer repayment and higher losses incurred from selling repossessed vehicles. However, given the increase in the level of repossession activities, the net impaired loans ratio improved to 0.52% from 0.56% as of 31 March 2024.

• 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 29%.

• 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 0.63x vs 0.52x last year.

Impact

• Aligning our forecast to the 1QFY25 results by raising the credit loss charge assumption, we tweaked our FY25/26/27 net profit forecasts to RM38.0/39.8/42.5mn from RM41.1/42.2/44.5mn previously.

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 increase. 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 lower Elk-Desa’s TP to RM1.30/share from 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 widened due to the recent decrease in the share price, we upgraded Elk-Desa from sell to HOLD.

Source: TA Research - 16 Aug 2024