Review

• Elk-Desa reported a 5.4% decline in 1HFY25 net profit to RM16.4mn. The weaker YoY results are due to an increase in the impairment allowance, which ballooned to RM20.8mn vs RM12.9mn a year ago. With that, ElkDesa's results came in below our estimates, with the PBT accounting for 44% of our full-year forecast. The slight variance was due to a higher-thanexpected impairment allowance.

• QoQ, the group’s net profit broadened by 1.6% on the back of a 1.2% QoQ increase in revenue, along with a 9.6% decline in expenses. Impairment allowance grew by 11% QoQ. A single-tier interim dividend of 2.0 sen per share (2QFY24: 2.0 sen per share) was declared during the quarter.

• YoY, the 1HFY25 revenue grew by 17.8% due to better contributions from both the hire purchase and furniture segments. Revenue in the furniture segment rose by 23% YoY, attributed to higher demand from the domestic wholesale market in East Malaysia. The increase aligns with management's efforts to penetrate the markets in Sabah and Sarawak. Despite that, the segment's gross profit margin narrowed from 35% to 33%, attributed to higher shipping costs to East Malaysia. However, management also noted that the impairment allowance for the segment fell by 92% due to better repayment from the furniture dealers. Recap that the allowance climbed by 151% in the previous quarter.

• YoY revenue from the hire purchase segment grew by 15%. The hire purchase receivables widened by some 18% YoY to around RM694mn as of 30 September 2024. The HP segment’s 6M PBT, however, slipped by 4% YoY to RM22.1mn from RM22.9mn a year ago, attributed to an increase in the impairment allowance.

• In 1HFY25, the credit loss charge increased to 1.54% from 0.9%. Management attributes the higher impairment allowance to slower hirer repayment. However, the net impaired loans ratio improved to 0.44% from 0.52% as of 30 June 2024.

• Overall operating expenses fell due to lower staff costs. The cost-toincome ratio improved sequentially to around 24% from 29% in 1Q. Meanwhile, the drawdown of borrowings increased to support the rise in hire purchase receivables. Elk-Desa's gearing levels rose to 0.64x vs 0.52x last year.

Impact

• Aligning our forecast to the 1HFY25 results by raising the credit loss charge assumption, we tweaked our FY25/26/27 net profit forecasts to RM34.9/36.5/39.4mn from RM38.0/39.8/42.5mn 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. Management notes rising pressure in collection and recovery due to the uncertainties from the rising cost of living. Nevertheless, management will continue to focus on further reducing 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 with a sustained focus on Sabah and Sarawak. Management will be looking into optimising logistic arrangements to improve margins. Additionally, the group is looking to broaden its product's diversity and range while maintaining its strategy of offering high-quality furniture at affordable prices.

Valuation

• We maintain Elk-Desa’s TP at RM1.30/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, due to a reallocation of resources, we are taking this opportunity to cease coverage of this stock.

Source: TA Research - 14 Nov 2024