Affin Hwang cuts forecast on ELK-Desa

  • Stocks Analysis
  • Thursday, 20 Feb 2020

PETALING JAYA: Affin Hwang Capital Research has maintained its “buy” call on Elk-Desa Resources Bhd on its latest earnings coming in within expectations, but cut its earnings forecast for financial year 2020 (FY20)-FY22.

“Given our expectations of a moderation in the macro environment in first-half FY20 following the Covid-19 outbreak, we are of the view that there will be weaker credit growth and also higher risk of non-performing loans,” said the research house in a note.

Affin Hwang has lowered the forecast FY20-FY22 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 said it is upbeat on ELK-Desa’s prospects, as it remains a prudent mass-market hire purchase (HP)-financing player in the Klang Valley.“We also see better dividends and expansion in return on equity, potentially driving a rerating of the stock,” it added.

For the third quarter of 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 at RM28.3mil, 16.1% higher y-o-y, which came in within Affin Hwang’s expectations.

“The robust growth was underpinned primarily by its HP receivables growth of 32% y-o-y, on the back of additional leverage through a medium-term note programme and expansion of its block-discounting facility. “Its net debt-to-equity stood at 0.46 times and we believe that there is still further room for growth towards the 1.5 times to 2.0 times debt-to-equity level,” it said.

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