RCE's 2QFY25 net profit decreased by 27.2% YoY to RM27.8m, due to weaker revenue on lower loan disbursements as the Group sought to preserve asset quality, as well as higher employee share scheme (ESS) expenses. Cumulative 1HFY25 net profit of RM58.1m is below our and consensus estimates, accounting for 40% of full-year forecasts. The discrepancy in our forecast was mainly due to lower-than-expected operating income coupled with higher-than-expected staff cost. We cut our earnings estimates by 6%-12%, to account for the lower operating income. Nevertheless, we believe that the worse could be over for RCE, as financing growth should be lifted by the impending civil servant salary hike in December. Following our earnings adjustment, our DDM-derived TP is reduced to RM1.50, given the lower DPS assumption. We maintain our Neutral call on RCE. On a side note, RCE declared a first interim dividend of 3sen.

• Results review. 2QFY25 revenue fell by 8.4% YoY to RM80.4m, mainly due to lower operating income given management's prudent approach to prioritizing better asset quality. As a result of the lower operating income coupled with higher staff cost due to ESS expense, RCE's 2QFY25 net profit decreased by 27.2% YoY to RM27.8m.
• Declining financing receivables. RCE's financing receivables of RM2.06bn fell by 0.8% QoQ (-1.4% YoY), in tandem with management's strategic approach to focus on its asset quality due to 'compressed financing' whereby some applicants have accumulated debt (with DSR >60%) as they borrowed from several financial institutions concurrently. However, we foresee stronger earnings going forward, as the upcoming civil servant salary adjustment should lead to an increase in financing receivables.
• Non-performing financing (NPF) still elevated. RCE's NPF ratio increased to 4.3% from 4.2% in 1QFY25 as the higher impairments was mainly caused by early retirements and resignations among the civil services. We expect NPF ratio to moderate going forward, as the salary adjustment should help to maintain the attractiveness of the civil service, potentially leading to lower early retirements and resignations.

Source: PublicInvest Research - 21 Nov 2024