Non-bank lender ELK-Desa Resources Bhd may not be on the radar of that many investors.
But unknown to them, the company has been charting decent enough growth over the past few years.
And, amid the current headwinds such as slower economic growth and poorer consumer sentiment, the firm which makes money by lending funds to consumers who want to buy used vehicles, is looking at a 15%-20% CAGR over a five-year period.
Executive director and chief financial officer Teoh Seng Hee says ELK-Desa is well aware of the current external headwinds impacting the economy.
“We are keeping a very close eye on developments.
“However, we believe that macroeconomic fundamentals such as a low unemployment rate and manageable inflation, which are key factors to the performance of our hire purchase business, remain resilient, ” Teoh tells StarBizweek.
Teoh, whose father Teoh Hock Chai controls 37.5% of the company also says ELK-Desa does not expect the current headwinds to be prolonged and as such, does not foresee “any significant impact” to its business.
The reason for such optimism could be that it operates in the niche market of used vehicle financing.
According to Teoh, that market remains underserved as most providers are focused on other segments or areas of car financing.
He stops short of naming his competitors but says: “We do avoid direct competition with the banks.”
“All of us (i.e. the non-bank financial institutions) operate within our own carved-out segment and believe we have ample space to survive, if not thrive.”
According to information in its latest annual report, the group’s hire purchase financing division had a customer base of about 38,500 individuals, as of March 31 2019.
Challenge lies in maintaining asset quality
Additionally, its average outstanding net hire purchase receivables per customer was approximately RM13,000.
In the past two years, the group has stepped up its hire purchase financing efforts by increasing the loan size to a maximum of RM35,000 to include a larger range of popular vehicle models, according to the annual report.
Teoh doesn’t give indications of how big a market is available for the company to tap into, but says that based on the company’s assessment, the market that it currently operates in, is “much larger” than its current hire purchase financing portfolio.
“Moreover, we are currently only serving the KL and Selangor markets, allowing us ample opportunity for growth.”
He says the challenge is to ensure that the quality of the firm’s assets or loans remain high through “robust risk management and active credit recovery efforts”.
“Our key challenge is to continue to drive down credit loss ratios and keep them low, ” Teoh says but doesn’t offer any current figures on these. He says the company’s hire-purchase financing portfolio has grown at a CAGR of 14% in the last five financial years, indicating that there is demand for used affordable cars.
“We expect this trend to continue, driving growth for our group in the coming financial years, Teoh says, adding that the company aims to remain within the niche market that it has carved for itself.
That said, in a recent note to clients, Affin Hwang Investment Bank which tracks ELK-Desa, cut its earnings estimates for the firm for FY20-22, by 5.7%-9.1% to factor in possible higher credit costs.
This is premised on expectations that the macroeconomic environment will moderate in the first half of this year following the Covid-19 outbreak which could increase the risk of higher non-performing loans.
Still, despite a more prolonged caution in the market, the research outfit says it remains upbeat on ELK-Desa’s prospects as it “is a prudent mass-market HP-financing player in the Klang Valley.”
“We also see better dividends and expansion in ROE, potentially driving a re-rating of the stock.” For the nine months ended Dec 31,2019, ELK-Desa made a net profit of RM28.3mil on revenue of RM110.5mil compared with a net profit of RM24.4mil on revenue of RM90.9mil for the same period, a year earlier.
At its close yesterday, its stock which is trading at a price-to-earnings ratio of about 13 times, finished at RM1.66 per share, valuing the entire company at some RM493mil.
Interestingly, ELK-Desa also has a furniture trading business, which commenced operations in mid-2015. This business is currently focused on wholesale home furniture sales, domestically. Contribution from this segment, however, is minute at the moment with the company’s profits from hire-purchase forming more than 90% of the entire group’s earnings.
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