• Keep SELL, with new MYR2.40 TP from MYR2.30, 24% downside. RCE Capital’s 9MFY24 (Mar) results came in line with our and consensus expectations. Key positives were the robust non-profit income and receivables growth, slightly offset by higher credit costs in 3QFY24. Our stance on the counter remains – while the group continues to be fundamentally sound, its valuation still appears stretched.

• 9MFY24 results in line. 3QFY24 net profit of MYR34.6m (-2% YoY, -10% QoQ) brought the 9MFY24 total to MYR109.7m (+6% YoY) – meeting our and Street full-year forecasts. Cumulatively, total income grew 9% thanks to stronger non-profit income (+38%), whereas net profit income stayed flat. The bottomline impact, however, was mitigated by higher opex (+29%). On a QoQ basis, 3QFY24 was hit by higher impairment allowances (+21%). All in, 9MFY24 ROE stood at 18.2% (9MFY23: 16.9%). No dividend was declared.

• Robust receivables growth, softer yields. RCE’s financing receivables added 6% YoY in 3QFY24 (QoQ: +1%), ahead of the banking system’s +5% YoY. However, average asset yields were down by an estimated 50bps in 9MFY24, due to lagged effects from profit rate adjustments. Management revised its profit rate higher in Oct 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 7-8% (9MFY23: c.6.7%).

• Higher credit costs not a concern. 3QFY24 saw credit costs inch up sequentially to 159bps from 133bps (3QFY23: 111bps). 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. It also has an estimated financing loss coverage of c.153% for buffer.

• Potential impact from one-off civil servants’ incentive. Civil servants in Malaysia are expected to receive a one-off incentive payment worth MYR1,000-2,000 on 23 Feb 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.

• We raise FY25F-26F net profit by 4% on improving asset yields, but keep FY24F flat. Our TP is lifted to MYR2.40 (from MYR2.30), and includes an unchanged 0% ESG premium/discount. We maintain our SELL call on valuation grounds – at 2.6x P/BV vs 17-18% ROE, we believe the stock’s valuation is overstretched.

Source: RHB Research - 9 Feb 2024