PETALING JAYA: At a time when companies face increasing commodity and interest rate costs, RCE Capital Bhd is one company that is able to lower its costs.
RCE is engaged in giving personal loans to civil servants and is a member of the Arab-Malaysian Corp Bhd (Amcorp) group.
The former Rediffusion Bhd changed its core business and name to RCE after it sold its radio broadcasting station to Star Publications (M) Bhd.
In its new core business, RCE's major cost is in its cost of funds. It had issued private debt securities (PDS) to raise funds in 2004 and last year. As the company now has an excellent credit record of more than two years, it could sell its receivables under asset-backed securities, which should carry a significantly lower cost than PDS.
Amcorp managing director Soo Kim Wai told StarBiz that RCE's non-performing loans (NPLs) were only 2% to 3% of total loans given out. That is as low a rate as that in some of best banks. Such a low rate of NPLs would enable RCE to raise funds at a cost of around the same level as the funding cost of banks.
The low rate of NPLs is largely due to the method of loan repayment, which is by way of salary deductions. As such, the main risk is if the borrower leaves the civil service, especially as the loans given are unsecured personal loans.
That is, however, well-provided for. Its provisions for doubtful debts far exceed the NPLs. “RCE makes general provisions (GPs) of 8% each year, and it used to be as high as 10%, when banks make GPs of just 1%,” Soo said.
Hence, each year, RCE writes off 8% of its year's loans as a general provision when its actual NPL rate is just 2% to 3%.
“This rate of GP evolved from RCE's previous business of financing the purchase of electrical appliances by the public, where NPLs were higher,” he added.
RCE has, therefore, built up a reserve in its over-provisions of GPs, which can be used in future as it progressively lowers its rate of GPs.
In addition, the group has built up a large reserve of loan receivables. RCE has net receivables of about RM300mil which, based on its historical net profit margin of about 38%, offer future net profits of over RM100mil.
Further, RCE is on a fast track. Standard & Poor's (S&P) stated in a report that RCE's gross receivables grew more than 100% to RM570mil in its 2006 financial year from RM270mil in the previous year. So, even if RCE grows at the same pace this year, it could add future profits of another RM100mil.
These reserves of future profits exceed the company's market capitalisation of RM170mil. This is thus an under-valued stock.
Similarly, using price/earnings ratio (PE) as a yardstick, S&P projected RCE's net profit to improve 30% to RM25.8mil for its current financial year ending March 31, 2007, and a PE of just 6.5 times.
There is a lot of room for RCE to grow. The company has 29,000 accounts only, whereas there are a total of 1.2 million civil servants.
The biggest player in this business is Bank Rakyat, which has shown how large and profitable this business can be. Bank Rakyat, which also gives loans to civil servants, reported a net profit of RM295mil last year.
RCE has shown an ability to gain market share. “When we first took over RCE, its market share was 2% and now it is 6%,” Soo said, adding that “we are targeting to increase that to 10% within three years.”
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