RCE Capital (RCE) is generally involved in the provision of consumer financing services, with Malaysian civil servants as its end customers. The group has a unique salary deduction scheme whereby the installments are collected through monthly installments via two agents namely EXP Payment SB and Angkatan Koperasi Kebangsaan Malaysia (ANGKASA). Looking ahead, we forecast a 3-year earnings CAGR of 5%, on stable growth in financing receivables and a stable credit cost assumption. In addition, for the next 3 years, we forecast a dividend payout of c.60% as we err on the conservative side on the group’s dividend payout policy of 60-80% of net profit. We believe that the recent decline in share price represents a good buying opportunity, therefore we initiate coverage on RCE with a Trading Buy call and a TP of RM2.95 based on Dividend Discount Model (DDM), implying a P/BV of 2.4x.

• Personal financing provider. RCE Marketing (RCEM) initially started by providing general financing services and trading of electrical home appliances. In 2006, RCEM shifted to provide consumer financing services and it has remained as the largest revenue contributor to the group, accounting for more than 95% of RCE’s topline. The group is estimated to service around 78k of the total Malaysian civil servant population of 1.6m, which we believe has much room to grow given its c.5% market share. Based on the group’s financing receivables of RM2bn, we estimate RCE to have a market share of c.1% in the personal financing industry. One of its main competitive advantages is the group’s turnaround speed whereby RCE will be able to disburse the funds within 24 hours once approved.

• Steady earnings growth on better asset quality. We foresee RCE’s earnings to increase at a CAGR of c.5% for FY24F-26F, on stable financing receivables growth, supported by higher civil servant emoluments. Note that civil servant emoluments grow at a 10-year CAGR of 3.9%, while RCE’s financing receivables increased by a higher quantum, growing at a 10-year CAGR of c.6%. Meanwhile, we believe that RCE is able to maintain its nonperforming loans (NPL) ratio at a stable level due to its unique salary deduction scheme and managements’ preference to prioritize customers with better asset quality, supported by its credit scoring model. As a result, RCE’s NPL ratio has been fairly stable, maintaining at c.4% for FY19-23.

• Initiate with a Trading Buy call. While RCE’s current valuations implies that the share is trading at a premium of 2.3x P/BV, we believe that the valuation is justified given its ROE of c.17% remains attractive, as compared to the banking sector average ROE of 10-12%. We initiate coverage on RCE with a Trading Buy and a DDM derived TP of RM2.95, which implies a P/BV of 2.4x. We remain optimistic over the group’s business model, as we foresee a growth in the group’s financing receivables (3-year CAGR 4%), improving asset quality as well as an attractive dividend yield of c.5%.

Source: PublicInvest Research - 26 Feb 2024