KUALA LUMPUR: Affin Hwang Capital research sees room for growth for Elk-Desa Resources Bhd even in the Klang Valley alone, due to it being a relatively small player.
"We remain upbeat on ELK-Desa’s prospects (post meeting with management) as its focus in the mass market used-car financing business is expected to generate high-teens EPS growth in FY20-21E while its ROE is expected to expand further towards 10% from 8% in FY19," it said in a note.
The research house maintained a buy call on the stock with a target price of RM1.98.
Affin Hwang said ELK-Desa's gearing ratio stands at 0.28x compared to Aeon Credit at 2.7x and RCE Capital at 2.8x as at March 19.
It added that it operates in a relatively steady used car financing market, where demand is not significantly affected by global trade and geopolitical uncertainties.
ELK-Desa has taken the initiative to boost its receivables growth (up 23% y-o-y in FY19) through block discounting of payables, which was evident by the increase in the gearing level from 0.1x in FY18 to 0.28x in FY19, said Affin Hwang.
"Though the rise in gearing was minimal, this had partially helped to bolster FY19 net profit by 27% yoy (on an EPS basis +13.3%). With expectation of a 16-20% growth in receivables p.a. and coupled with increased leverage, we believe that FY20E-21E EPS could grow by 17.3-21.5% yoy."
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