RCE Capital’s Valuations Overstretch; RHB Keeps SELL Call

RHB Investment Bank (RHB IB) maintained its stance on RCE Capital Bhd , saying while the counter is fundamentally sound, valuations is still stretched, post financial results for third quarter ended Dec 31, 2023 (3QFY24).

It maintained a SELL call on valuation grounds as we believe the stock’s valuation is overstretched at 2.6x price to book value ratio (P/BV) compared to between 17% and 18% return-on-equity (ROE).

“However, we raise FY25F and FY26F net profit by 4% on improving asset yields, but keep FY24F flat. Our target price (TP) is lifted to RM2.40 from RM2.30, 24% downside.

“This includes an unchanged 0% ESG premium or discount,” it said in its Malaysian Results Review today (Feb 9).

The personal financing provider’s 3QFY24 net profit of RM34.6 million brought the 9MFY24 total to RM109.7 million – meeting RHB IB and and Street full-year forecasts.

“Key positives were the robust non-profit income and receivables growth, slightly offset by higher credit costs in 3QFY24.

“Cumulatively, total income grew 9% thanks to stronger non-profit income, an increase of 38%, whereas net profit income stayed flat.

“The bottomline impact, however, was mitigated by higher operating expenses (opex), an increase of 29%. On a quarter-on-quarter (QoQ) basis, 3QFY24 was hit by higher impairment allowances, a surge of 21%,” said the research house.

RHB IB said RCE’s financing receivables added 6% YoY in 3QFY24, an increase of 1% QoQ , ahead of the banking system’s 5% YoY.

“However, average asset yields were down by an estimated 50 basis points (bps) in 9MFY24, due to lagged effects from profit rate adjustments.

“Management revised its profit rate higher in October 2022, and yields have begun improving on a sequential basis, though net profit margin (NPM) will take time to recover to management’s comfort level of 7 to 8%.”

The research house said higher credit costs in the third quarter, inching up sequentially to 159bps from 133bps, is not a concern.

“We learnt that this was due to exits from the civil service, mainly the education sector. While exit trends are unpredictable, management is not overly concerned, and is confident that the group can obtain the necessary recoveries.

However, RHB IB said that there could be a potential impact from one-off civil servants’ incentive, worth between RM1,000 and RM2,000 on 23 February 2024.

“This could halt receivables growth momentum in 4QFY24 due to early repayments and/or softer demand for financing. Nevertheless, management does not view this as a long-term negative, and looks forward to the civil service wage revision, which should be completed by the end of the year and is positive for long-term growth,” it added.

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