Progress in the Stockbroking Business

Management observed that initiatives to penetrate the institutional segment had made significant progress, highlighted by the onboarding of several GLC and non-GLC institutional funds. Management observed that client engagement and marketing initiatives are gaining positive momentum following the establishment of new institutional sales and research teams aimed at enhancing product offerings and improving services to meet the needs of institutional clients.

While the focus in 2024 would be on enhancing capacity and capabilities through investment in personnel, management anticipates a more significant impact from institutional sales in 2025 and 2026. This may accelerate management’s goals to reach a balanced 50% sales mix between its retail and institutional sales segments. Management observed that utilising the extensive network of the Group Executive Chairman, YBhg. Datuk Wira Farhash Wafa Salvador J.P. has played a crucial role in developing the institutional business.

With the increasing momentum in institutional sales, we anticipate that the partnership with Yuanta will play a more significant role. Management observed that although there has been minimal progress concerning the collaboration with Yuanta Securities (HK), announced in March 2024, the partnership offers a convenient platform and an additional service for clients seeking access to overseas trading. Alongside mutual client onboarding and research support, this partnership could enable Apex to utilise Yuanta's broad regional expertise. Potential benefits include cross-market opportunities for access, marketing strategies, and expanded service offerings like derivatives, which might generate new revenue streams and a more extensive customer base for Apex.

Meanwhile, plans to improve its branch and remisier networks remain in place. Management believes that the 2% tax on dividend income for individual shareholders with annual dividend income exceeding RM100,000 will not negatively affect its aim to attract high-net-worth (HNW) individuals, as most of its retail investors remain invested.

Robust Demand for Money Lending

The revenue from the money lending business experienced a slowdown in the first quarter of 2024 but quickly rebounded in the second quarter. Management observed that the previous slowdown was attributed to an increase in repayments; however, demand continues to be strong and is expected to keep growing in the third and fourth quarters. Total advances increased by 19% QoQ to RM117.3mn, driven by loans issued to individuals, which rose by 26% QoQ, followed by companies with a growth of 15% QoQ. Despite the rise, the top five largest borrowers remained broadly consistent, with the average outstanding loans for these borrowers around RM15.2mn, supported by collateral averaging RM17.3mn. Management observed that, despite fierce competition, average lending rates held steady at approximately 10.5%.

Nonetheless, we observe that some borrowers may have experienced challenges with the frequency of their payments, owing to the increase in the amount owed compared to their facility limit. Management acknowledged their vigilance regarding a possible decline in the asset quality of these borrowers yet emphasised that the loans continue to be current and have a solid historical payment record. Management expresses assurance in the quality of loan assets for certain borrowers, even while acknowledging possible impairment risks. Management believes no provision is required currently, as all loans are secured with more than 100% collateral.

We anticipate that the upcoming completion of the Menara Apex sale for RM55mn will significantly contribute to growth, particularly in the money lending sector. The Conditional period for the Sale and Purchase Agreement (SPA), which was mutually agreed to be extended until 15 December 2024, may be further extended to the first quarter of 2025. A potential RM37mn gain from the sale could also serve as a cushion for any significant provisions arising from the money lending business. In addition, the group retains three land assets valued between RM80-90mn, although there are no plans for their sale at this time.

Higher Finance Costs are Envisaged in 2025-2026

While we maintain a positive outlook on management's aggressive strategy to grow the stockbroking business, which includes bolstering institutional sales and creating a corporate finance division to improve ancillary services, we anticipate that these initiatives will lead to increased overhead expenses related to personnel costs and the modernisation of advanced IT systems. Apex's aggressive growth strategy is anticipated to result in an additional reduction of the group's cash and bank balances, which have fallen from RM104mn to RM33.3mn since FY22. Management suggested the possibility of raising borrowings to reach a comfortable gearing level of 0.3x to 0.7x. At the same time, initiatives are underway to enhance the management of finance costs by exploring alternative financing options like revolving credits.

Valuation and Recommendation

We revise Apex’s FY24 net profit projection to encompass the 18 months ending on 30 June 2025, reflecting the shift in fiscal year-end from 31 December to 30 June. Applying a 30% discount to the sector's average updated P/E ratio of 15x, we revise Apex's target price to RM1.30 from RM1.35. However, due to a reallocation of resources, we are taking this opportunity to cease coverage of this stock.

Source: TA Research - 14 Nov 2024