Friday 29 Mar 2024
By
main news image

This article first appeared in The Edge Malaysia Weekly on November 28, 2022 - December 4, 2022

RCE Capital Bhd, which provides personal financing to civil servants, has seen elevated levels of loan loss provisioning over the last three quarters due to an increase in customers — in particular, teachers and academic staff — leaving their jobs.

However, analysts believe the worst of the problem may be over for the Main Market-listed company. They see provisions coming in lower in the next few quarters, which should be positive for its earnings.

“We did see a spike in provisions in the April-June quarter, when such cases were on the rise. This was due to the company making pre-emptive provisions for accounts of customers who have left the civil service, and thus were dropped from RCE’s salary deduction scheme. The July-September quarter numbers show that provisions/impairment losses have tapered off from that spike, which gives us some optimism that the worst might indeed be behind the company,” Nabil Thoo, an analyst with RHB Research who tracks RCE, tells The Edge.

RCE released its financial results for the second quarter of the financial year ending March 31, 2023 (2QFY2023) last Monday. Its impairment allowances on financing came in at RM6.87 million — an increase of more than nine times from RM743,000 in the previous corresponding quarter. It made impairment allowances of RM8.2 million in 1QFY2023 and RM5.86 million in 4QFY2022.

Despite the elevated provisions, RCE’s net profit in 2QFY2023 rose to a quarterly record of RM36.54 million, representing an increase of 15.8% year on year and 13.4% quarter on quarter.

Revenue stood at RM81.76 million, up 17.1% y-o-y and 5.3% q-o-q, mainly because of higher early settlement and fee income arising from increased refinancing activities by customers. RCE’s financing grew by a strong 5.6% y-o-y, while its gross non-performing financing ratio was unchanged at about 4%.

For the cumulative six months ended Sept 30, 2022 (1HFY2023), net profit rose 2.7% y-o-y to RM68.77 million even as revenue improved 7.8% y-o-y to RM159.42 million. Although RCE’s performance was within analysts’ expectations, what came as a surprise was the declaration of a special dividend of 18 sen a share and a higher-than-expected interim dividend of 5 sen a share.

RCE’s share price jumped 5.6% to RM1.87 the following day (Nov 22) — the highest close in about 10 months — on the most active trading volume in just over a year. The counter then eased one sen the next day before closing higher at RM1.87 on Nov 24, giving the company a market capitalisation of RM1.37 billion. The stock has shed 5.5% YTD.

Maybank Investment Bank Research analyst Samuel Yin Shao Yang, who has a “hold” call and target price of RM1.67 on the stock, expects RCE’s earnings to “normalise” to between RM32.5 million and RM35 million a quarter going forward.

“What boosted its earnings in 2Q was the fact that there were a lot of early settlements and fee income, in the sense that because interest rates are rising, people wanted to lock in the relatively lower rates before they are hit with higher rates. But I think that will eventually subside,” he tells The Edge.

Yin anticipates RCE making lower provisions in the quarters ahead. “RCE’s management guided that the impact from the [issue] of teachers and academic staff leaving the civil service may have already peaked in June or July this year. So, provisions should start to level off.”

Earlier this year, local newspapers reported that a growing number of teachers were opting for early retirement, in what was seen as a worrying trend. In a statement in April, the National Union of the Teaching Profession, or NUTP, estimated that more than 10,000 have submitted their papers annually for early retirement over the last few years.

Meanwhile, given the rising interest rate environment, RCE’s cost of funds is seen moving up as the bulk of its funding is sourced from sukuk. Bank Negara Malaysia has raised the overnight policy rate (OPR) by 25 basis points (bps) four times this year for a total of 100bps, and is largely seen raising the rate by another 25bps in January next year.

Nevertheless, RHB Research’s Thoo opines that rising interest rates will likely have only a “minimal” impact on RCE’s earnings this year and the next.

“Most of RCE’s financing and funding are made on a fixed profit rate basis, given that it is a shariah-compliant company. Hence, we expect minimal impact from interest rate hikes on its earnings. The impact would most likely come in the form of higher sukuk rates on new issuances, one of which is tentatively scheduled for Nov 22,” he adds.

“[RCE’s] management usually maintains profit rate margins within a certain threshold, and only looks to reprice assets once the margins shrink to a level below the minimum. But at the moment, there appears to be no urgent need to reprice assets. Stable repayment trends from customers also indicate that customers are coping well with the current interest rate environment.”

Maybank IB Research’s Yin notes that RCE is making an effort to diversify its funding base. “The thing is, sukuk rates that are primarily based on MGS [Malaysian government securities] yields have been very volatile. I think RCE is now going more for revolving credit, which is based more on the OPR. And although the OPR is on the way up, the [quantum of change] is not nearly as steep as MGS and their yields.”

Thoo sees RCE’s net profit growing marginally by 1.8% to RM136 million in FY2023, and by 3.1% to RM140 million in FY2024. He has a “neutral” call and target price of RM1.95 on the stock.

“After a recent share price rally, we believe the stock is fairly valued at a price-to-book value of 1.48 times, given that it is trading over +1 standard deviation from its five-year mean, with RCE’s defensive attributes — particularly its resilient salary deduction scheme and prudent asset quality controls — already priced in. We downgrade the stock to ‘neutral’ as a result,” Thoo said in a Nov 22 report.

KAF Equities, which also tracks RCE, has a “buy” call on the stock and a target price of RM2.

 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share