Elk-desa Resources Berhad

$ELKDESA / 5228 (ELK-DESA RESOURCES BERHAD)
Research by TA
Hold – TP RM1.30

“Lower YoY Net Profit due to Rise in Impairment Allowance"

We lower Elk-Desa’s TP to RM1.30/share from RM1.35/share. Our valuation is based on a 25% discount to Malaysia’s average NBFI (such as AEON Credit and RCE Capital) P/B ratio of 1.6x due to Elk-Desa’s smaller market cap and less superior ROEs. However, given that the risk-reward potential has widened due to the recent decrease in the share price, we upgraded Elk-Desa from sell to HOLD.

Analyst:
Li Hsia Wong
liwong@ta.com.my

$ELKDESA / 5228 (ELK-DESA RESOURCES BERHAD)
Research by RHB
Neutral – TP RM1.10

“Poised For Continued Growth; U/G To NEUTRAL"

Upgrade to NEUTRAL from Sell, new MYR1.10 TP from MYR1.05, c.5% FY25F (Mar) yield. ELK-Desa Resources’ 1QFY25 results missed on the back of higher-than-expected credit costs, which we think was partly influenced by seasonal factors. With its strong receivables growth momentum, and potential benefits from the civil service wage revision and stronger MYR, things could be heading in the right direction for the group. However, we think that at 1.1x P/BV vs c.9% ROE, the current valuation looks rather pricey for entry.

Analysts:
Nabil Thoo
nabil.thoo@rhbgroup.com
David Chong CFA
david.chongvc@rhbgroup.com

Continuing the list here (part 4):

$LEESK / 8079 (LEE SWEE KIAT GROUP BERHAD) (MC: RM141.0Mil)– Dividend Policy of at least 30% of PAT
$FOCUSP / 0157 (FOCUS POINT HOLDINGS BERHAD) (MC: RM360.4Mil) – Dividend Policy of at least 30% of PAT
$TAMBUN / 5191 (TAMBUN INDAH LAND BERHAD) (MC: RM474.5Mil)- Dividend policy of 40% ~ 60% of PAT
$ELKDESA / 5228 (ELK-DESA RESOURCES BERHAD) (MC: RM554.9Mil) - Dividend policy of 60% of PAT
$HUPSENG / 5024 (HUP SENG INDUSTRIES BERHAD) (MC: RM840mil) - Dividend payout of at least 60% of PAT


MC: Approximate Market Cap

**Note: the dividend payout is subjected to cash flow, valuation gain/loss of properties, etc. (for details please read their respective annual reports)

Changes in Director's Interest (Section 219 of CA 2016) - TEOH SENG HUI

DEALINGS IN LISTED SECURITIES (CHAPTER 14 OF LISTING REQUIREMENTS) : Dealings Outside Closed Period

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - ZHONGXIN RESOURCES SDN BHD

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - TEOH HOCK CHAI FAMILY (L) FOUNDATION

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - MR TEOH HOCK CHAI @ TEW HOCK CHAI

DEALINGS IN LISTED SECURITIES (CHAPTER 14 OF LISTING REQUIREMENTS) : Dealings Outside Closed Period

Changes in Director's Interest (Section 219 of CA 2016) - MR TEOH HOCK CHAI@TEW HOCK CHAI

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - ZHONGXIN RESOURCES SDN BHD

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - ENG LEE KREDIT SDN BHD

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - TEOH HOCK CHAI FAMILY (L) FOUNDATION

Changes in Director's Interest (Section 219 of CA 2016) - MR TEOH HOCK CHAI@TEW HOCK CHAI

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - MR TEOH HOCK CHAI @ TEW HOCK CHAI

DEALINGS IN LISTED SECURITIES (CHAPTER 14 OF LISTING REQUIREMENTS) : Dealings Outside Closed Period

OTHERSELK-DESA RESOURCES BERHAD ("ELK-DESA" OR "THE COMPANY") PROPOSED RENEWAL OF AUTHORITY FOR THE COMPANY TO PURCHASE ITS OWN SHARES.

Quick Overview of $ELKDESA / 5228 (ELK-DESA RESOURCES BERHAD):
- A non-bank lender with niche in the hire purchase financing business of used motor vehicles sector, specifically the used car markets.
- Targeting buyers of higher B40 / lower M40 who are seeking small-value financing (loan size maximum around RM35k, with an average loan of ~RM14k), which are underserved by financial institutions.
- Has a dividend policy payout of no less than 60% of net profit.

***

Understanding their business:
ELK-Desa Resources Berhad has 2 business segments through its wholly-owned subsidiaries, ELKDesa Capital Sdn Bhd and ELK-Desa Furniture Sdn Bhd.

1. ELK-Desa Capital Group - hire purchase (HP) financing for used motor vehicles as well as selling general insurance policies as an insurance agent. The main business pillar taking up 90% of total PBT.

Key financial/operating metrics to evaluate and things to look out for evaluate under this segment:
a. Total HP Receivables has been growing 12% YOY, in Q4FY24 it has reached RM641.7mil, and FY24 has reached all-time high at total of RM2.42bil.

b. Cost-to-income ratio has been steadily decreasing over the past few quarters, from 37% in Q4FY23 to 28% in Q4FY24, their target is to maintain below 30%.

c. Net Impairment Loans Ratio (aka NPL – non-performing loan ratio)
As compared to FY23, it has decreased from 1.92% to 0.56% in FY24. This is because of the positive impact of repossession activities on HP Portfolio quality. Full resumption of repossession activities since 2023 has been key factor in lowering impaired loans ratio, and hence improving their asset portfolio quality

d. Impairment allowances (RM’mil) in FY24 at 26.39mil compared to FY23 at 7.34mil. Credit Loss charge (%) stands at 4.12% as compared to FY23 at 1.23% due to higher losses incurred from sales of repossessed vehicles and absence of impairment reversal in FY23.

**Credit loss charge (i.e. impairment allowance over average net hire purchase receivables)

e. Gearing ratio in FY24 is at 0.62; they do look to increase gearing ratio to 0.7-0.9 in FY25 and a maximum 1.5% in beyond that to facilitate their HP growth and ensuring asset quality. No intention on tapping into capital markets and will only rely on internal funds & bank borrowings.

f. Cost of funding: current round of loan facility is ending in June 2024. They are renegotiating new financing, expecting cost of funds to hover c. 4.8% - 5.3%.
g. Overall landscape: pending change/updates of regulation in governing consumer credit players such as “Buy now, Pay later” by the consumer credit oversight board.


2. ELK-Desa Furniture Group - business of trading and wholesaling of home furniture which makes up approximately 10% of total PBT.

a. FY24 recorded RM54.55mil revenue, flattish if compared to FY23. For Q4FY24, there was an increase in revenue to RM16.56mil (18%) vs Q4FY23, which is in tandem with higher furniture sales. However, they had a lower PBT margin of 5.47% in FY24 as compared to FY23 (10.07%) due to write down of inventory cost, weaker foreign exchange and competitive pricing strategy, as well as other expenses.

b. The furniture are 60% sources locally through contract manufacturers and it is only sold in the domestic market, with focus on expanding penetration to Sabah and Sarawak.


Quite a straightforward and easy-to-understand business model.
Catalyst for the next 2-3 years might be the used car market growing and the sustainable demand for financing, since new vehicle sales did increase tremendously in the past 1-2 years. However, would need to pay attention to credit loss charge, impairments, cost of funding to minimize the downside risk, as well as any changes in the consumer credit industry.

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - MR TEOH HOCK CHAI @ TEW HOCK CHAI

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - ZHONGXIN RESOURCES SDN BHD

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - TEOH HOCK CHAI FAMILY (L) FOUNDATION

Changes in Director's Interest (Section 219 of CA 2016) - MR TEOH HOCK CHAI@TEW HOCK CHAI

DEALINGS IN LISTED SECURITIES (CHAPTER 14 OF LISTING REQUIREMENTS) : Dealings Outside Closed Period

DEALINGS IN LISTED SECURITIES (CHAPTER 14 OF LISTING REQUIREMENTS) : Dealings Outside Closed Period

Changes in Director's Interest (Section 219 of CA 2016) - MR TEOH HOCK CHAI@TEW HOCK CHAI

Changes in Sub. S-hldr's Int (Section 138 of CA 2016) - MR TEOH HOCK CHAI @ TEW HOCK CHAI

$ELKDESA / 5228 (ELK-DESA RESOURCES BERHAD)
Research by TA
Sell – TP RM1.35

“Lower YoY Net Profit but Within Expectations"

We maintain Elk-Desa’s TP at RM1.35/share. Our valuation is based on a 25% discount to Malaysia’s average NBFI (such as AEON Credit and RCE Capital) P/B ratio of 1.6x due to Elk-Desa’s smaller market cap and less superior ROEs. However, given that the risk-reward potential has narrowed due to the recent increase in the share price, we downgrade Elk-Desa to SELL from hold.

Analyst:
Li Hsia Wong
liwong@ta.com.my

$ELKDESA / 5228 (ELK-DESA RESOURCES BERHAD)
Research by RHB
Sell (Maintained) – TP RM1.05

“Strong Growth, But Challenges Remain; SELL"

Keep SELL and MYR1.05 TP, 21% downside. ELK-Desa Resources’ FY24 results met expectations, barring a higher-than-expected effective tax rate. The hire purchase (HP) segment continues to record strong growth despite still-elevated credit costs, while the furniture segment remains beleaguered by a margin squeeze and stiff competition. Maintain SELL, on valuation grounds.

Analysts:
Nabil Thoo
nabil.thoo@rhbgroup.com
David Chong, CFA
david.chongvc@rhbgroup.com

ELKDESA - Notice of Book Closure

Interim Dividend