- Keep BUY, new GGM-derived MYR2.00 TP from MYR1.80, 18% upside with c.6% FY24F (Mar) yield. ELK-Desa Resources’ 9MFY23 results were a beat for the third consecutive quarter, with earnings already at a record high with one quarter to go. ELK continues to trade at c.1x P/BV – a discount to its peers’ 1.2-1.4x. With receivables growth expected to be sustained and asset quality stable, we remain bullish on the counter.
- Record-high earnings at the 9-month mark. ELK recorded 9MFY23 net earnings of MYR40.2m (doubled YoY), which accounts for 104% of our full- year forecasts. The variance came from greater-than-expected hire purchase receivables (HPR) growth and lower-than-expected impairment allowances. The group’s 9MFY23 earnings have already beaten the previous full-year record of MYR35.4m achieved in FY21.
- Hire purchase segment. HPR increased 19% YoY (QoQ: +8%) in 3Q23, which led to higher net interest income (+14% YoY, +6% QoQ). Positive JAWs during the quarter led to an improved CIR of 28.5% (2Q23: 29.2%, 3Q22: 31.0%). While impairment allowances surged 83% YoY to MYR3.78m (doubled QoQ), 3Q annualised credit cost of 256bps remains well below management’s guidance of 300-400bps on an annualised basis.
- Furniture segment. QoQ, revenue grew 18% (YoY: -11%) owing to stronger demand during the festive period. Lower staff and other operational costs drove opex down 4% QoQ (YoY: -6%). Overall, segmental PBT was steady, at MYR1.4m (+28% QoQ, -21% YoY).
- Bonus issue. ELK announced a bonus issue of one new share for every two shares held at the entitlement date of 20 Mar 2023.
- Outlook. HPR growth has already exceeded its guidance of 5-10% for the full year, but management is positive of even further growth. Repayment trends appear stable, but we could see a spike in credit costs in the next few quarters as the company intends on writing off some of its impaired accounts that have been idle since the beginning of the pandemic. To be cautious, we have factored in MYR1-4m of additional write-offs for FY23- 25F. Notwithstanding the possible write-offs, we expect earnings delivery to remain solid – driven primarily by a strong HP segment, helped by a steady furniture segment.
- We lift FY23-25F forecasts by 13-14% as we factor in higher HPR growth assumptions, albeit slightly mitigated by increased credit costs. Our TP rises to MYR2.00 as a result, and is based on a GGM-derived 1.3x P/BV. Our TP also bakes in a zero ESG premium/discount, in line with our in- house methodology. While record-year prospects have likely been priced in, we continue to like ELK for its steady earnings delivery, stable asset quality and generous dividend payouts.
Source: RHB Research - 17 Feb 2023
