ELK-Desa unperturbed by lacklustre economy

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This article first appeared in The Edge Malaysia Weekly, on November 21-27, 2016.


ELK-Desa Resources Bhd appears to be unperturbed by the current lacklustre economic conditions. While many lenders are lamenting difficult loan growth, ELK-Desa recently proposed a rights issue that will raise RM59.84 million to finance its hire-purchase business.

The rights issue, at RM1.16 apiece, will see the issuance of up to 51.59 million new shares on the basis of one rights share for every five existing shares.

“We are expecting the hire-purchase business to grow steadily. Anything from 5% to 10% growth in hire-purchase receivables is good. We are preparing the funds for future [hire-purchase disbursements],” says ELK-Desa chief financial officer and executive director Teoh Seng Hee, referring to the proposed rights issue.

ELK-Desa’s hire-purchase business focuses on used-car financing for mass-market vehicles. Loans are usually below RM20,000. Giving out small loans is how the company spreads the risk and allows it to cater for more people who need such loans, says Teoh.

It is interesting to note that the used-car financier has had little trouble with debt repayments, unlike many other lenders that have experienced loan delinquency amid the economic uncertainty.

Teoh says ELK-Desa’s non-performing loans (NPL) have been on a downward trend over the last six months. In its financial year ended March 31 (FY2016), ELK-Desa’s NPL ratio stood at 1.2% and loan loss coverage was 286%, according to its 2016 annual report.

Impairment allowance for the second quarter ended Sept 30 was higher at RM5.03 million, up 15% from RM4.39 million previously. However, ELK-Desa says in its quarterly financial report that this was due to the higher growth of hire purchase receivables.

As at Sept 30, hire-purchase receivables stood at RM88.79 million, 8.6% higher than RM81.74 million as at FY2016.

While the hire-purchase business is growing at a steady rate, the company’s other division — a new venture into household furniture — remains loss-making. Asked when the furniture division will break even, Teoh says it depends on the economic environment.

The furniture division contributes about 30% to revenue while the remaining 70% is derived from its hire-purchase business.

The furniture division commenced operations in July last year, focusing on retail, but in April this year, it expanded the business to include manufacturing, wholesaling and exports.

“Economic sentiment locally has not been rosy, sales haven’t been what we would like. The furniture business is still new, we need more time for this division. During uncertain economic times, consumers might not want to change their furniture so often. In addition, when property sales aren’t good, furniture sales tend to be affected as well.

“But borrowers who take a loan for a used car probably need the car for their daily commute,” Teoh says of the contrast in the performance of the two divisions.

That said, ELK-Desa does not expect the furniture segment to make any significant contribution to the group’s financial performance this year but it is optimistic on its hire-purchase business.

“The group is not likely to experience any slowdown in the demand for second-hand car financing for FY2017, as the business segment that the group is currently operating in is still relatively small compared with the overall auto financing industry. Furthermore, given the uncertain labour market, demand for second-hand cars may increase as opposed to new cars,” it says in its Sept 30 quarterly statement.

The used-car financier’s earnings have grown over the last six months. For the cumulative six months ended Sept 30, net profit increased 21.8% to RM10.91 million, or 5.4 sen per share, from RM8.96 million, or 7.21 sen per share, in the previous six months. This comes on the back of 52.3% revenue growth to RM44.52 million from RM29.24 million.

The company declared an interim dividend of 3.25 sen per share for the quarter ended Sept 30. During its previous financial year, the company announced a dividend policy to distribute not less than 60% of its annual net profit with effect from FY2016. Its historical dividend yield has always been attractive, above 5%, since its listing on the stock exchange.

Over the last year, ELK-Desa’s share price has been hovering between RM1.16 and RM1.29. Last Thursday, the counter closed at RM1.17, implying a 20% discount to its net assets per share and 9.1 times price-earnings ratio. At RM1.17, it has a market capitalisation of RM265.4 million.