• Keep SELL and MYR1.05 TP, 21% downside. ELK-Desa Resources’ FY24 results met expectations, barring a higher-than-expected effective tax rate. The hire purchase (HP) segment continues to record strong growth despite still-elevated credit costs, while the furniture segment remains beleaguered by a margin squeeze and stiff competition. Maintain SELL, on valuation grounds.

• Results review. 4QFY24 net profit of MYR9.7m (+30% YoY, +1% QoQ) brought the FY24 total to MYR36.7m (-23% YoY). Revenue for the full year grew 8% YoY on stronger contributions from the HP segment, although offset by a muted furniture division. Opex rose by a smaller 6% YoY and, as a result, CIR was brought down to 30% (FY23: 31%). The main YoY weakness stemmed from a normalisation of impairment allowances (>200% YoY), as ELK saw abnormal collections in 1HFY23. All in, FY24 PBT of MYR49m (-23% YoY) came within our/consensus estimates, but PAT missed due to a higher- than-expected effective tax rate. An interim DPS of 3 sen was declared, bringing the full-year total to 5 sen i.e. a 62% payout (FY23: 62%).

• HP segment still the key driver. HP receivables grew 12% YoY (QoQ: +4%) in FY24, in line with management’s target of >10% YoY growth. We think the momentum can be sustained, especially as the strong new car sales in 2021 and 2022 start filtering through to the used car market. On funding, management sees further room to gear up to 1-1.5x, from 0.5x currently, to support future growth. At present, however, it believes a c.10% YoY growth rate strikes a good balance between growth and asset quality – given the current market conditions.

• Impairment allowances to ease. FY24 impairment allowances for the HP segment totalled MYR26m (+>200% YoY), translating to a credit cost of 4.4% (FY23: 1.4%). This is not overly surprising, as the figure bakes in repossession (or repo) costs following the resumption of repo activities in FY24 – as a result, the group has managed to pare its net impaired loans ratio down to 0.56%, from 1.92% in FY23. Moving forward, management will aim to bring credit costs down to 3.75-4% in FY25F – at the higher end of the group’s usual 3-4% run rate.

• Furniture segment impacted by margin squeeze. Revenue from this business grew 20% QoQ (YoY: +18%) in 4QFY24 as a result of successful promotions held, in conjunction with the festive seasons. However, segmental GPM narrowed to 32% (3QFY24: 36%) on the back of said promotions and also adverse FX movements affecting import costs.

• We lower FY25 and FY26 net profit forecasts by 3-7%, mostly from higher credit costs, in line with guidance. Our TP remains unchanged after we introduced FY27 estimates, and includes an unchanged 2% ESG premium.

Source: RHB Research - 24 May 2024