ELK-Desa stays upbeat about prospects

TheEdge Tue, Aug 13, 2019 09:20am - 4 years View Original


KUALA LUMPUR: ELK-Desa Resources Bhd has seen steady growth in revenue and profit for the last four financial years. The non-bank financial institution expects this growth momentum to sustain amid improving consumer sentiment, with revenue forecast to rise by 15% to 20% in the next five financial years as well.

Powering the group’s growth is its hire-purchase financing for used motor vehicles, said executive director and chief financial officer Henry Teoh Seng Hee. The segment has been delivering lucrative net profit margins of between 32.6% and 37.8% in the last five financial years.

“The group’s hire-purchase financing portfolio has grown at a compound annual growth rate of 14% in the last five financial years. If we remain disciplined [in granting automotive financing], [to continue growing by] 15% to 20% in FY20-24 (financial years 2020-2024) shouldn’t be a problem. Revenue is also expected to grow at a correspondingly rapid pace,” Teoh told The Edge Financial Daily in an interview.

ELK-Desa’s net hire-purchase receivables continued to see steady growth each year, rising 22% to RM490 million in the financial year ended March 31, 2019 (FY19) from RM400.42 million in the previous year.

This growth also drove a double-digit rate improvement to the group’s bottom line and top line for FY19. The group grew its FY19 net profit by 27% year-on-year (y-o-y) to RM32.92 million on the back of a 19% y-o-y increase in revenue to RM123.39 million.

Teoh’s optimism stems from the public’s continued demand for affordable cars. “The size of the used car market is big,” he added.

While official statistics for used car transactions are unavailable, Teoh noted that there were 5.2 million cars registered under the Road Transport Department system in Kuala Lumpur and Selangor, which is an area of opportunity for the group to grow its hire-purchase financing for used motor vehicles.

Teoh also expects new vehicle sales to drive the sales growth in the used car segment, which will also benefit its hire-purchase financing segment.

“We estimate that for every new car [transaction], it would result in a second-hand car transaction,” he said.

The Malaysian Automotive Association has projected new vehicle sales to hit 600,000 units this year. Vehicle sales in the first six months of 2019 grew 1.02% to 296,334 units from 289,599 units a year ago.

To facilitate expansion of its hire-purchase financing business, ELK-Desa on July 15 set up its maiden medium term notes (MTN) programme of up to RM1 billion. The first tranche of senior MTN totalling RM105 million was issued on July 19.

“MTN will finance our growth. As such, we don’t need to worry about insufficient funds to grow [our hire-purchase financing business],” said Teoh, adding that the group needs about RM100 million per year to support its growth target for the hire-purchase financing business.

Teoh said with the MTN, the group is expected to leverage up, with its gearing ratio expected to almost double to 0.5 times in FY20, up from 0.28 times as at March 31, 2019.

Still, he opined that the group’s gearing ratio will remain at a “comfortable” level and lower than its peers.

Teoh also said the reduction in the overnight policy rate by 25 basis points by Bank Negara Malaysia in May augurs well for the group, as cheaper borrowing costs would further drive its margin expansion.

The hire-purchase financing division recorded a profit before tax (PBT) of RM42.85 million in FY19, contributing to 98% of the group’s PBT of RM43.81 million. The remaining was contributed by its furniture trading division.

ELK-Desa will also focus on monitoring its credit loss charge this year.

The provision for credit losses is treated as an expense in the group’s financial statements.

“We managed to drive down our credit losses to 3.8% in FY19 from 5.5% in FY18, which was a first since 2014. We hope to continue to maintain if not lower the credit loss charge,” said Teoh.

“We have a larger team of people in the credit recovery team. A larger group of people will better engage with customers, especially when our customer base is growing larger,” he added.

ELK-Desa has a dividend policy to pay out annual dividend of 60% of the group’s net profit, as it seeks to strike a balance of paying dividends to shareholders and retaining enough cash to fund the group’s expansion plans.

Over the last five consecutive financial years, ELK-Desa’s dividend yield averaged 5.5% per year while its dividend payout ratio averaged around 65% per year.

Affin Hwang Capital Research remains upbeat about ELK-Desa’s prospects as its used-car financing business is expected to generate high-teens earnings per share growth in FY20 and FY21.

“Being a relatively small player (outstanding receivables amount to 0.3% of the car financing market in Malaysia), we see room for growth even in the Klang Valley alone, coupled with strong support from car dealers.

“With expectation of a 16-20% growth in receivables per annum and coupled with increased leverage, we believe that FY20-21 EPS could grow by 17.3-21.5% year-on-year,” the research house said in a note to investors on June 17.

Affin Hwang Capital Research also said ELK-Desa’s gearing ratio of 0.28 times, compared to AEON Credit Service (M) Bhd’s 2.7 times and RCE Capital Bhd’s 2.8 times as at March 31, 2019, gives it ample potential to leverage up and expand its scale given its business operation in a steady used-car financing market where demand (primarily from the mass market) is not significantly affected by global trade and geopolitical uncertainties.

It is maintaining a “buy” call on ELK-Desa, with an unchanged target price of RM1.98, indicating a potential return of 19% from its close of RM1.67 last Friday, with a market capitalisation of RM495.98 million. Its share price has gained 39.5% over the past year from RM1.19.

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