Elk-Desa reported yet another strong YoY results performance. 12M net profit ballooned YoY to RM47.7mn from RM25.8mn a year ago due to solid revenue growth, lower finance costs and writeback in impairment allowance. Depite that, Elk-Desa’s results fell slightly short of our expectations, with net profit accounting for 93% of our full-year forecast. QoQ, the group’ net profit declined by 32.6% to RM7.5mn.
A second single tier interim dividend of 3.5 sen per share was declared. In addition to the first interim single tier interim dividend of 4.5 sen per share (3.0 sen per share after restated for bonus issue), the total dividend for the financial year would be 6.5 sen per share (FY22: 3.50 sen after restated for bonus issue), representing a dividend pay out ratio of around 62%.
12M revenue jumped by 20.4% YoY due to better contributions from both the hire purchase and furniture segments. 12M revenue in the furniture segment surged to RM54.5mn from RM43.6mn a year ago. 4Q23 furniture sales were lower by 3% YoY although the gross profit margin increased from 31% in 4Q22 to 38% due to lower freight charges.
Revenue from the hire purchase segment remained buoyant, rising 18% YoY. 4Q23 hire purchase revenue also expanded by 22% YoY. The increase was underpinned by hire purchase receivables, which widened by some 23% YoY to RM575.1mn as of 31 March 2023.
Overall operating expenses expanded YoY due to the increase in the hire purchase segment which registered higher staff costs as the hire purchase portfolio ballooned. This translates to a cost-to-income ratio of around 37%. The group’s 12M PBT surged to RM63.3mn vs. RM34.9mn in FY22. The better-than-expected PBT was underpinned by an impairment allowance of RM7.5mn, vs RM22.4mn a year ago.
Credit loss charge decreased from 1.27% to 1.09%. Management noted that this is due to a significant reduction in the non-performing accounts YoY, which was underpinned by a recovery in activities and an improvement in the repayment trend. However, on a QoQ basis, the impairment allowance expanded by 90% due to slower higher repayment. The net impaired loans ratio weakened to 1.92% as of 31 Mar 2023 from 1.28% as of 31 December 2022.
Elsewhere, the group’s bank borrowings increased by 70%, attributed to the higher drawdown of block discounting facilities to support the increase in hire purchase receivables. Despite that, Elk-Desa's gearing levels remain manageable at 0.42x.
Incorporating the FY23 results, we tweaked Elk-Desa’s FY24 and FY25 net profit forecast to RM41.2mn and RM43.0mn from RM42.3mn and RM43.3mn. We forecast FY26 net profit to accelerate by 6% to RM45.5mn.
We expect the overall demand for used-car hire purchase financing to remain buoyant. However, as ELK-Desa focuses on steadily raising the hire purchase receivables portfolio towards pre-pandemic levels, management remains cautious of the ongoing challenging macro environment. The QoQ increase in impairment allowances is inline with expectations that credit charge trends is normalising. We continue to note that potential downside risks, such as rising living costs due to the increased inflationary pressures and rising interest rates, could affect borrowers' disposable incomes and ability to repay.
In line with plans to increase its footprint in the domestic home furniture wholesale market, ELK-Desa will continue to work closely with furniture dealers and manufacturers to find the perfect furniture products for Malaysian consumers. In the meantime, efforts are being made to optimise stock and logistics management capabilities, including managing potential supply chain bottlenecks resulting from logistics interruptions, to ensure the timely delivery of customer orders.
Tagging a 15% discount to Malaysia’s average NBFI (such as AEON Credit and RCE Capital) slightly higher P/B ratio of 1.35x (from 1.3x) due to Elk-Desa’s smaller market cap, we raise the stock’s fair value to RM1.23/share from RM1.18/share. We maintain our HOLD recommendation on the stock.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....