Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on April 30, 2018 - May 6, 2018

IT might not be a high-flyer on Bursa Malaysia, but ELK-Desa Resources Bhd is betting that a slow and steady performance will set the group up for greater success.

The family-run business has carved a name for itself as a reputable lender in the used passenger car market, targeting buyers who are seeking small value financing. Its hire-purchase financing operations are currently concentrated in the Klang Valley, where the company’s share is less than 1% of the total used cars registered in Kuala Lumpur and Selangor.

Executive director and chief financial officer Henry Teoh Seng Hee says there are no official statistics on the size of the used car market at present as it is fragmented and comprises many small players.

“Taking the figure of four million cars that are running on Kuala Lumpur and Selangor roads, two million are potentially cars aged from 6 to 15 years that we would focus on financing. Of the two million, maybe 10% of the people would change their cars and hence, there are about 200,000 potential hire-purchase customers,” he tells The Edge.

He points out that ELK-Desa’s current portfolio size is only about 35,000 individuals.

“Thus, because we are a small player and the market potential is big, it is easy for us to [continue to] grow. It may not be a situation where the pie [in financing used cars] is growing, but it’s just that we are small,” Seng Hee explains.

But as exciting as the prospect of ELK-Desa scaling up its business is, he says the group is in no hurry to grab a larger share of the used car pie, which he thinks remains largely underserved by traditional financing providers.

That has been the approach of the family-run company, led by its founder and executive chairman Teoh Hock Chai. The second generation, consisting of 36-year-old Seng Hee and his two older brothers — Teoh Seng Hui is CEO and group executive director while Teoh Seng Kar is non-independent non-executive director — has joined the board to help look after the day-to-day running of the company. Hock Chai is ELK-Desa’s single largest shareholder, with a 38.55% stake as at April 24.

“We know there is a big pie [in financing used cars], but this is our way of managing the business. We don’t want to have a quantum leap in our loan portfolio. We would prefer to stick to a business model that brings long-term stable growth rather than one where we go all out to win market share by ramping up our borrowings,” says Seng Hee.

“At the end of the day, we are looking at sustainable growth rather than one-off [gains]. We have to take it one step at a time.”

Thus, it is not surprising that ELK-Desa has no intention to venture beyond the Klang Valley as it believes there is still room to grow here. “[That is] until such a time when we are unable to find growth here, then we may have to do something different,” says Seng Hee.

The group reported a record net profit of RM23 million for the financial year ended March 31, 2017 (FY2017), up 22.4% from the previous year. Revenue was up 47.3% to RM94.49 million.

Seng Hee says ELK-Desa’s performance in the last financial year was driven by its hire-purchase financing division, which contributed 98% to the group’s FY2017 earnings.

Net profit and revenue growth looks set to continue in FY2018. Net profit grew 8.6% year on year to RM18.01 million in the cumulative nine months ended Dec 31, 2017 (9MFY2018), while revenue improved 9.8% year on year to RM76.43 million. The company will release its fourth-quarter and full-year results for FY2018 next month.

Seng Hee declined to give specific guidance for FY2019, except to say that the group’s revenue and profit grow in tandem with the increase in its net hire purchase receivables.

The group’s net hire purchase receivables have grown at an average rate of 13% to 15% over the past five years. They grew by a notable 22% year on year to RM350.47 million in FY2017.

“ELK-Desa’s current portfolio size of about 35,000 individuals — which amounts to about RM400 million of net hire purchase receivables — is expected to grow by 10% to 15%, based on the growth trajectory over the past few years,” Seng Hee says.

Sales of new passenger cars fell 8% year on year to 44,489 units in March, according to figures released by the Malaysian Automotive Association.

Seng Hee notes that the decline in new car sales will eventually have an impact on the second-hand car market. “The slowdown in new car sales has a lag impact — about five years — on the second-hand car market. Still, from our perspective, we are very small compared with the overall [used passenger car] market. So, even if the overall market is down by 30%, it is still okay for us.”

ELK-Desa sees the local automotive market picking up after the upcoming general election.

The group’s non-performing loan ratio remains at a manageable level of 1.2%, while loan-loss coverage increased slightly to 289% as at March 31 last year, providing a stronger buffer for the group against credit losses. Credit loss charge increased to 6.3% in FY2017 from 5.5% in FY2016.

According to Seng Hee, ELK-Desa carefully manages its risk by having a cap on the amount of loan a car buyer can borrow. “Our maximum loan cap is RM20,000, with an average payback period of five years.”

However, the group has increased its risk appetite to include financing of used vehicles valued at RM35,000 in the past two to three years, he adds.

“We note that there is a group of cars under Perusahaan Otomobil Kedua Sdn Bhd (Perodua) with good second-hand value, and we don’t want to miss out on this car segment. So far, the NPLs (non-performing loans) look good and hence, we will consider financing up to RM35,000 for selected brands such as Perodua and Japanese car makes.”

But ELK-Desa is not putting all its eggs in one basket and has ventured into the furniture trading business since mid-2015. The group is currently undertaking an operational restructuring in that segment to refocus its sales on the domestic market.

However, furniture sales have been relatively sluggish as they are pegged to the property market. “Nevertheless, it is unlikely to drag down the group’s earnings because its profit contribution is too small,” Seng Hee explains.

Today, ELK-Desa has a dividend policy of maintaining a payout ratio of not less than 60% of the group’s net profit. Over the last five consecutive financial years, its dividend yield averaged 5.4% per year, while its dividend payout ratio averaged to around 61% per year. This makes ELK-Desa an attractive dividend stock for investors to consider.

Shares of ELK-Desa have been trading within a 52-week range of RM1.14 to RM1.26, before closing at RM1.18 on Thursday, bringing a market capitalisation of RM338.14 million. Based on Thursday’s closing price, the stock trades at a price-earnings multiple of 14.39 times FY2018 earnings forecast despite the group’s strong growth potential.

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