Affin Hwang cuts forecasts on ELK-Desa on expectation of weaker credit growth


  • Analyst Reports
  • Wednesday, 19 Feb 2020

KUALA LUMPUR: Affin Hwang Capital research maintained its buy call on ELK-Desa Resources Bhd as its latest earnings came within expectations but cut its earnings forecast for FY20-22.

"Given our expectation of a moderation in the macro environment in 1H20 following the Covid-19 outbreak, we are of the view that there will be weaker credit growth (FY20E: +21% yoy; FY21E: 15% yoy) and also higher risk of NPLs," said the research house in a note.

Affin Hwang lowered FY20-22 earnings by 5.7-9.1% to factor in higher credit costs, and lowered its target price to RM1.82 from RM1.98 previously.

On a positive note, the research house is upbeat on ELK-Desa's prospects as it remains a prudent mass-market HP-financing player in the Klang Valley, it said.

"We also see better dividends and expansion in ROE potentially driving a re-rating of the stock," it added.

For 3Q'FY20, ELK-desa posted a net profit of RM9.4mil, which was 22.3% higher year-on-year (y-o-y) but 1.9% lower quarter-on-quarter (q-o-q) due to a higher tax rate.

Over three quarters, net profit was RM2.8.3mil, 16.1% higher y-o-y, which came within Affin Hwang's expectations.

"The robust growth was underpinned primarily by its hire-purchase (HP) receivables growth of 32% yoy, on the back of additional leverage through an MTN programme and expansion of its block-discounting facility.

"Its net-debt-to-equity stood at 0.46x and we believe that there is still further room for growth towards the 1.5-2.0x debt-to-equity level," it said.
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