ELK-Desa Resources Bhd
(June 17, RM1.44)
Maintain buy with an unchanged target price of RM1.98: ELK-Desa Resources Bhd has boosted its receivables growth, up 23% year-on-year (y-o-y) in the financial year 2019 (FY19), through a block discounting of payables, evident by an increase in the gearing from 0.1 times in FY18 to 0.28 times in FY19.

Though the rise in gearing was minimal, this partially helped bolster FY19 net profit by 27% y-o-y on an earnings per share (EPS) basis of +13.3%. With an expected growth of 16% to 20% in receivables per annum, coupled with an increased leverage, we believe the estimated FY20 and FY21 EPS could grow 17.3% to 21.5% y-o-y.

Compared with similar peers such as Aeon Credit and RCE Capital, with far larger receivables, we believe ELK-Desa, operating on the same business model, has ample potential to leverage up and expand its scale. ELK-Desa’s gearing ratio stood at 0.28 times compared with Aeon Credit’s 2.7 times and RCE Capital’s 2.8 times as at March 2019. In our view, the industry’s dynamics remains in favour of ELK-Desa as it operates in a relatively steady used car financing market where demand, primarily from the mass market, is not significantly affected by global trade and geopolitical uncertainties.

We are upbeat about ELK-Desa’s prospects as it remains a prudent mass market hire-purchase (h/p) financing player in the Klang Valley. We also foresee a potential rerating of the stock through better dividend payouts and an expansion in return on equity. — Affin Hwang Capital, June 17