RHB Research has given RCE Capital a “BUY” rating, with a revised target price (TP) of MYR1.92, which translates to 16% upside potential, with c.5% FY23F (Mar) yield. RCE Capital’s 1QFY23 results missed expectations, mainly due to the conservative impairment of accounts. It is expected provisions to normalise in the quarters ahead, as asset quality stabilises and recovery efforts are being stepped up. This, coupled with sustained financing demand, point to better earnings ahead. Contrary to concerns, it is believed NIM compression would be manageable, given mitigation efforts by management.
1QFY23 results missed estimates. 1QFY23 net profit of MYR32.2m (+2% QoQ, -9% YoY), accounted for c.24% of the street’s FY23F earnings. The YoY decline was mainly due to the full impairment of accounts that dropped off from the salary deduction scheme. PIOP grew by a modest 1.5% YoY, as lower income from early settlements led to a 5.5% YoY drop in net fund-based income, which offset the 27% YoY growth in other income. 1QFY23 ROAE was 14.8% vs 14.7% in 4QFY22.
Asset quality. Impairment allowances spiked to MYR8.2m in 1QFY23 (4QFY22: MYR5.9m), matching the 4QFY20 peak seen during the COVID-19 pandemic. Management attributed this to the conservative full provisioning of exposures to borrowers that had left the civil service. There were noticeable resignations and early retirements within the academic and healthcare
sectors. GILs rose 6.5% QoQ, lifting the GIL ratio to 4.0% vs 3.8% 4QFY23. Efforts are being made to recover the outstanding balances, which would result in write-backs, if successful. Management remains vigilant on asset quality, notwithstanding the improvement seen in July.
Demand for financing still strong. Gross financing grew 1.4% QoQ (FY22:+1.8% YoY), helped by the economic reopening. Management believes growth is sustainable, given the strong momentum in financing applications. RCE has also launched some campaigns to capture the lending opportunity. The research house has pencilled in loan growth of 4% for FY23F.
Working to manage NIM pressures. With all of RCE’s financing receivables on fixed rates, against 71.5% of its financing liabilities being on fixed rates as well, the rising interest rate environment would have a negative impact on NIM. To mitigate the NIM pressures, RCE is focusing on higher-profit rate products to boost asset yields, while the utilisation of floating rate revolving credits has helped to lower funding costs. These measures should help keep NIM compression manageable.
Earnings and TP. With 1QFY23 PIOP within the analysts’ expectations and credit cost likely to normalise, hence they make no changes to their FY23-25F earnings, for now. But the analysts has revised the TP to MYR1.92 (from MYR2.00), as the analyst refreshed their GGM assumptions for heighten macroeconomic risks. Their TP also incorporates a 2% premium to the intrinsic value for its ESG score of 3.10, based on our in-house proprietary methodology.
Downside risks: i) Higher-than-expected credit cost, and ii) weaker-than-expected financing growth and net financing margins.
Salient points:-
Target Price (Return): MYR1.92 (+16%)
Price (Market Cap): MYR1.66 (USD273m)
ESG score: 3.10 (out of 4)
Avg Daily Turnover (MYR/USD) 0.34m/0.08m
