RCE Capital Bhd
(Feb 19, RM1.77)
Maintain buy with a higher target price (TP) of RM2.20: For the cumulative nine months ended Dec 31, 2019 (9MFY20), RCE Capital Bhd’s net earnings beat estimates, mainly driven by a resilient receivables growth, lower funding costs and well-contained credit costs.

Its valuation remains attractive, as the stock is currently trading at a mere 0.8 times financial year 2021 forecast (FY21F) price-to-book value (P/BV). Our revised TP values RCE Capital at a Gordon growth model-derived FY21F P/BV of 1.07 times against a projected FY20 to FY22 average return on equity of 16%.

RCE Capital’s profit after tax and minority interest for 9MFY20 was RM82.2 million — 79% and 83% of our and street’s estimates.

Year to date, its pre-provision operating profit grew 9% year-on-year (y-o-y), mainly lifted by a robust top-line growth, with net interest income and non-interest income up 11% and 6%.

Its operating expenditure grew 13% y-o-y, but the overall cost-income ratio remained well-controlled at 23.1% or +6 percentage points y-o-y.

RCE Capital’s net earnings expanded faster y-o-y at 14.6%, thanks to lower impairment charges of 15%. Its credit cost improved to 112 basis points (bps) from 139bps over a year ago.

Its asset quality remained healthy, with non-performing loan and gross impaired loan ratios down 15bps and 26bps quarter-on-quarter (q-o-q).

RCE Capital’s gross receivables expanded 5% y-o-y or 1.6% q-o-q to RM1.8 billion. RCE Capital looks set to achieve its mid-single digit growth target for FY20.

The management has not seen any slowdown in lending activities despite a softening macroeconomic environment. Applications remain robust, with no signs of a meaningful slowdown.

Downside risks to our recommendation include higher credit costs, weaker net financing margins and a growth in receivables. — RHB Research Institute, Feb 19