PETALING JAYA: Despite some softness of its business in the recent quarter, Elk-Desa Resources Bhd
is expected to sustain its growth momentum underpinned by the continued growth of its hire purchase (HP) receivables.
TA Research said the non-bank lender’s HP disbursements in the first quarter of financial year 2024 (1Q24) had eased by 36% year-on-year (y-o-y) to RM44.3mil, following strong receivables growth in the previous financial year. The recovering economy and improved consumer sentiment supported the receivables growth in the previous financial year, which had since subsided, the research house added.
“Management attributes the decrease (in 1Q24) to their deliberate strategy to control disbursements more effectively. They aim to maintain a more sustainable growth rate of 10%-15% amid ongoing concerns regarding inflationary pressures and the repercussions of increased policy rates,” TA Research said in a report recently.
Despite the anticipated moderation in HP receivables growth, the research house remains optimistic Elk-Desa will be able to surpass its pre-Covid-19 pandemic levels of RM610mil by the end of FY24.
“Looking ahead, we anticipate that its HP receivables will continue to grow, with a projected 9% increase in FY24, followed by a slight improvement to 10% in both FY25 and FY26.
“We believe our forecast is reasonable due to car buyers seeking more cost-effective alternatives, which could drive increased demand for used cars, a growing supply of used cars in the market, as well as ongoing dealer initiatives such as offering extended warranty programmes to instill confidence in buyers,” TA Research said.
Elk-Desa’s impairment charge rose to 1.18% in 1Q24 from a net writeback of 1.01% in the previous year, which the research house said is “a return to more normalised credit loss charges”.
“During the quarter, Elk-Desa reported an impairment allowance of RM7.33mil. This increase was primarily driven by a slowdown in collection efforts and reduced customer repayment rates,” TA Research said.
The research house said Elk-Desa’s balance sheet as of 1Q24 has maintained its lean structure, with manageable gearing levels at 0.52 times, up slightly from 0.42 times in the previous quarter. However, with the growth of HP receivables, the group’s borrowings are expected to gradually rise over FY24, FY25, and FY26.
“This increase is expected to occur through drawdowns of block discounting facilities and potential medium term note issuances. Consequently, we predict the group’s gearing level will continue to climb. The rise in finance costs resulting from increased borrowing may exert downward pressure on potential earnings,” TA Research said.
TA Research maintained a “sell” call for Elk-Desa with a target price of RM1.28 a share.
