Elk-Desa Resources Bhd’s 3Q23 core net profit advanced 37.5% YoY to RM7.6m, bringing a significant 87.9% jump in FY23 core net profit to RM47.9m. The results, however, came in below expectations, amounting to 94.2% of our full year forecast at RM50.3m.
Key deviations were largely due to lower-than-expected margin resulted from higher operating costs.
Malacca Securities Sdn Bhd, in a anote today (May 123) said, meanwhile, a second interim dividend of 3.5 sen per share, payable on 22nd June 2023 was declared.
Elk-Desa year-on year (YoY) bottom line was seen to have soared on the back of higher contribution from the hire purchase segment as increase in revenue resulted from larger hire purchase portfolio outweighed the increase in impairment allowance, and the furniture segment due to lower freight charges as well as lower staff costs. QoQ, core net profit shrank 31.4%, mainly due to lower contribution from the hire purchase segment as impairment allowance climbed.
The impairment allowance on hire purchase receivables increased 4.2% YoY to RM6.8m, mainly due to slower hirer repayment. Credit loss charge however, declined from 1.3% to 1.1% due to larger hire purchase portfolio which grew 22.9% YoY and 2.6% QoQ to RM575.1m to cater to higher demand for hire purchase financing amidst post-pandemic environments.
Liabilities wise, bank borrowings increased 69.3% YoY due to higher drawdown of block discounting facilities to support the increased hire purchase receivables. As at 4Q23, ELKDESA’s gearing remained at a low level of 0.42 times.
Moving into FY24, we anticipate a moderate growth in hire purchase receivables due to the uncertain macro-economic conditions. Additionally, the used car financing industry may require process changes to comply with the new regulatory oversight by the Consumer Credit Oversight Board, which is expected to be implemented in 2024.
For the furniture segment, we continue to like ELKDESA’s strategy to focus on the domestic wholesale market to distribute its furniture products to over 800 furniture retailers throughout Malaysia, especially in Sabah and Sarawak.
Malacca Securities cited: “As the earnings came in below our expectations, we downgrade our earnings forecast by 14.6% to RM41.4m for FY24f. Meanwhile, FY25f earnings forecast is introduced at RM43.0m. The earnings forecast will take into account a modest growth on the hire purchase portfolio, as well as the gradual improvement on the furniture segment.
“We maintained our HOLD recommendation on ELKDESA, with a revised target price of RM1.02 after taking into consideration the increase in number of share arising from the bonus issue. The target price is derived by ascribing a P/B of 0.95x to FY24f book value per share of RM1.07. Meanwhile, ELKDESA remained committed to distribute not less than 60.0% of its net profit after tax.”
The firm cites that downside risks to our recommendation include the tabling of Consumer Credit Act (CCA). Upon implementation of the new CCA, ELKDESA might need to modify its operational procedure to comply with the requirements of the Act. Additionally, any logistics disruption could cause supply chain constraints and delay shipment for the furniture segment.
