Following our meeting with RCE’s management recently, we are more optimistic over its long-term growth, driven by the upcoming salary hike among civil servants in December this year though we remain prudent on RCE’s financing receivables growth in the near term. We believe that RCE’s financing receivables will only start to pick up in 2HFY25 however. While allowance for impairments remain elevated due to high level of resignations and early retirements, we think that the worst may be over, attributable to the 2-phase civil servant salary adjustment, which should help to reduce early retirements and resignations. More details on the salary adjustment will likely be revealed during the Budget 2025 announcement. All in all, we maintain our Neutral call and TP of RM1.60.

• 1QFY25 results recap. RCE’s 1QFY25 net profit decreased by 17% YoY to RM30.3m, due to lower fee income and higher allowance for impairment loss. In addition, Non-Performing Financing (NPF) continued its uptrend, as RCE saw its NPF ratio rise to 4.2% (1QFY24: 3.7%), mainly dragged by early retirements and resignations within the civil service.

• Muted financing receivables growth. Recall that RCE’s financing receivables declined by 1.2% on a QoQ basis, likely due to management’s strategy to remain prudent in terms of approval of new applications in order to ensure better asset quality. However, we think that the impending salary adjustment should lead to an increase in RCE’s financing receivables, although the positive impact will only be reflected in 2HFY25. Note that the Malaysian government previously announced a 7-15% salary adjustment among the civil servants which will be implemented in 2 stages, Dec 2024 and Jan 2026.

• Potential margin expansion going forward. While resignations and early retirements have remained elevated, we believe that the salary hike will help to mitigate these trends, which may result in lower credit cost going forward. We understand that RCE is looking to issue another round of sukuk amounting to RM150m in Dec 2024, where the proceeds will be utilised to refinance shortterm loans (revolving credit), potentially leading to an improvement in profit margins.

Source: PublicInvest Research - 9 Oct 2024