• Maintain SELL, new MYR2.70 TP from MYR2.40, 17% downside, c.5% FY25F (Mar) yield. RCE Capital’s 1QFY25 results disappointed as a result of slower-than-expected disbursements, which we expect will pick up later in the year. The group’s longer-term prospects look good, as it is a prime beneficiary of the revision to civil service wages, though near-term challenges remain. Our call is premised on valuation grounds.

• Results review. RCE’s 1QFY25 net profit of MYR30.3m (-18% YoY, +4% QoQ) missed expectations, forming 19%/20% of our/consensus’ full-year estimates. The key deviation from our numbers mainly came from lower- than-expected operating income (-8% YoY, -7% QoQ) as a result of softer financing disbursements during the quarter affecting both profit and non- profit incomes. Opex growth was a mild 3% YoY (QoQ: -19%), though impairment allowances, as guided, were up 64% YoY (QoQ: -25%).

• Deliberately slower financing growth? RCE’s gross financing receivables stood at MYR2.07bn at end-Jun 2024, a decline of 1% QoQ (YoY: +1%). This aligns with management’s guidance for muted financing growth in the near- to-medium term, as it shifts its focus towards asset quality. Moving forward, the impending salary increase for civil servants could lead to an acceleration in financing growth, though we note that this is set to take effect only in Dec 2024, or late-3QFY25 for RCE. We continue to forecast receivables growth in the mid-single digits for the group, with a pick-up in FY26F.

• Is asset quality under pressure? The group’s impairment allowances spiked 64% YoY (QoQ: -25% off a high base) in 1QFY25. The YoY increase is expected, as management had flagged that exits from the civil service had been elevated over the past 12 months. In a similar vein, the non-performing financing ratio rose to 4.2% from 4.0% in the previous quarter (Jun 2023: 3.7%). While exit trends are unpredictable, we think the impending revision to civil service wages could help to improve the attractiveness of the civil service over the long run and help curb some of the early exit cases, hence leading to lower impairment allowances moving forward.

• A short-term trading opportunity? The Prime Minister is expected to unveil more details on the revised civil servants’ remuneration scheme later today, with increments rumoured to be 15-42.7%. Given RCE’s strong niche in the civil servant financing space, we think the counter could garner near-term investor interest. However, we flag that the benefits from the revision will only likely be felt beginning 3QFY25 at the earliest, and that the group is still coping with significant challenges (eg fraud, early exits) in the meantime.

• Forecasts unchanged, but our TP rises to MYR2.70 (from MYR2.40) after updating our model inputs. Our TP includes an unchanged zero ESG premium/discount.

Source: RHB Research - 19 Aug 2024