• Maintain NEUTRAL and MYR1.95 TP, 2% upside with c.7% FY24F (Mar) yield. RCE Capital’s FY23 net profit of MYR138.8m is in line, and its higher non-profit income and new dividend policy are the key highlights. While valuations appear lofty at present, the company’s stable earnings prospects and our new forecasted yield of 7% (from 4-5%) could offer investors a defensive dividend play in the current market environment.

• Results in line. RCE’s 4QFY23 net earnings of MYR34.8m (+10% YoY, flat QoQ) brought the full-year number to MYR138.8m (+4% YoY), meeting our/consensus estimates. Net profit income contracted 2% YoY on the back of a higher drawdown of new borrowings (+16% YoY), albeit mitigated by a 57% growth in non-profit income. Prudent cost controls also bore fruit as the group recorded a 4% reduction in opex. A second interim DPS of 7 sen was declared, bringing total core DPS for FY23 to 12 sen (63% payout).

• Profit income to flow through in FY24F. RCE’s gross receivables rose by 8% YoY in FY23, even though it priced new assets higher from 2HFY23 onwards. This has not been reflected in FY23 profit income (+2% YoY), but management assured us the repricing should begin to flow through in FY24F – the profit recognition lag tends to take around 1-2 quarters. Elsewhere, the group is aiming for receivables growth to track the growth of the banking system (c.5% YoY in CY23 as per our forecasts).

• Asset quality still stable. Feedback from management suggests that its asset quality is stable – non-performing financing, using the ECL stage 3 balance as a proxy, has been hovering at 3.8-4% of gross receivables for the past four quarters. Looking ahead, credit costs should stabilise at 100- 200bps (annualised) per quarter.

• New dividend policy. Management announced a formal dividend payout policy of 60-80% of net earnings, against the 30-40% historical trend.

• Forecasts and TP. We adjust our FY24-25 estimates slightly to account for higher asset yields, and introduce FY26F numbers in this report. Our unchanged TP of MYR1.95 includes a 0% ESG premium/discount. In light of RCE’s new dividend policy, its yield of c.7% appears attractive for investors looking for a defensive option in the current challenging market environment. However, the counter is currently trading at a forward P/BV of 1.5x – near +2SD from its 5-year mean, ie the highest among the non-bank lenders under our coverage – which we deem to be lofty at present.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 24 May 2023