• Maintain SELL and MYR2.40 TP, 23% downside. RCE Capital’s FY24 (Mar) results missed our and Street’s expectations on the back of higher-than- expected operating and credit costs. While the impending revision to civil service wages will likely boost its financing growth prospects, we still prefer peers with similar ROE generation that are trading at cheaper valuations.

• Results review. 4QFY24 net profit of MYR29.1m (-17% YoY, -16% QoQ) brought the full-year total to MYR138.8m (flat YoY) – this missed both our and consensus’ estimates. The deviation from our numbers was mainly from higher-than-expected opex (+35% YoY) and greater-than-expected impairment allowances (+5% YoY). These weaknesses, however, were mitigated by strong non-II (+7% YoY). On a sequential basis, 4QFY24 NII shrunk 5% from profit expenses climbing by 4%, while impairment allowances were up 24%. On the whole, RCE achieved FY24 ROE of 17.0% (FY23: 16.5%). A second interim DPS of MYR0.07 was declared, bringing the full-year total to MYR0.15 (FY23: MYR0.12 ex-special dividend), and implying a 79% payout ratio (FY23: 63%).

• Rather muted financing growth. RCE’s gross financing receivables stood at MYR2.1bn at end-Mar 2024, up 4% YoY (flat QoQ) – this was slightly behind the banking system’s +6% YoY (+1% QoQ) over the same period. Management had previously flagged that it would be more cautious on disbursements in order to prioritise asset quality. Moving forward, Prime Minister Dato’ Seri Anwar Ibrahim’s announcement of a >13% salary increase for civil servants is positive for financing growth – we note that this is set to take effect only in Dec 2024, or late 3QFY25 for RCE.

• Is asset quality under pressure? The group’s impairment allowances spiked up by 24% QoQ (YoY: +27%) in 4QFY24, likely due to an increase in cases of workers opting for early retirement or exiting from civil service. In a similar vein, the non-performing financing ratio rose to 4.0% from 3.8% in the previous quarter (Mar 2023: 3.8%). While exit trends are unpredictable, we think the impending revision to civil service wages could help boost the attractiveness of the civil service over the long run, and curb some of the early exit cases.

• We lower FY25-26F net profit by 1% as we incorporate the latest full-year earnings into our model. Our key assumptions are largely unchanged – we are still forecasting mid-single digit financing receivables growth, and 1-2% credit costs. Our TP stays at MYR2.40, and includes a 0% ESG premium/discount, in line with our proprietary ESG scoring methodology.

• Upside risks to our call include better-than-expected disbursements and lower-than-expected credit costs.

Source: RHB Research - 27 May 2024