- Keep BUY, new GGM-derived MYR1.80 TP (from MYR1.60), 22% upside with c.5% yield. ELK-Desa Resources’ 1HFY23 (Mar) earnings convincingly beat our and consensus’ expectations on the back of strong hire purchase (HP) receivables growth and better-than-expected asset quality. Its solid set of results at half-time means that ELK is likely to achieve record-high net earnings in FY23.
- A resounding beat. ELK recorded 1HFY23 net earnings of MYR29.1m, which made up 84% of our full-year forecasts. The variance came from better-than-expected asset quality, as: i) there were low impairment allowances in 2QFY23 (halved YoY), ii) on top of an impairment reversal in 1QFY23. These factors led to a net impairment reversal of MYR3.3m for 1HFY23 (1HFY22: MYR13.7m impairment loss). Annualised ROAE was at 12.7%, with an interim DPS of 4.5 sen declared, bringing YTD yield to c.3%.
- HP segment. HP receivables increased 11% YoY (QoQ: +4%) in 2Q23, which led to higher net interest income (+42% YoY, -4% QoQ). The company’s NIM of 15.1% in 2Q23 appears to have normalised back to the pre-pandemic average of 14.5-15.5%. Its asset quality was a pleasant surprise, as better-than-expected repayment trends from customers led to credit costs of 32bps for the quarter (pre-pandemic average: 100-200bps). As a result, 2Q23 segmental PBT doubled YoY to MYR14.1m.
- Furniture segment. QoQ, revenue softened 17% - which was expected, given the seasonal factors. Impairment allowances for the segment doubled to MYR0.2m, as the group provisioned for late payments by dealers. Segmental PBT for the quarter stood at MYR1.1m (-18% QoQ).
- Outlook. Management expects HP receivables growth to be sustained, given a higher minimum wage requirement and the increasing popularity of online used car trading platforms. Asset quality remains a priority for the group, but a resumption in repossessing activities could help cushion any deterioration in repayment trends. 1HFY23 earnings have already exceeded its FY22 net profit, and we are confident that a record-breaking year is on the cards for the group.
- We lift FY23-25F net profit by 6-12% as we factor in lower credit cost assumptions and other slight changes. Our TP rises to MYR1.80 as a result, and is based on a GGM-derived 1.15x P/BV multiple. Our TP also bakes in a parity ESG premium/discount. We like ELK, as it is on track to achieving remarkable earnings growth, on top of having stable asset quality and a strong dividend yield of c.5%.
- Key risks include weaker-than-expected HP receivables growth, higher-than-expected credit costs and a weaker-than-expected furniture segment performance.
Source: RHB Research - 17 Nov 2022
