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ELK-Desa Resources Berhad has been listed on Bursa Malaysia since 18 December 2012. The company is involved in two business segments: hire purchase financing for used motor vehicles and furniture trading.
The company’s hire purchase financing operations are currently concentrated in the Klang Valley area. As an extension of its hire purchase financing business, the company also cross-sells motor related general insurance products to its hire purchase customers. These insurance products are mainly from leading insurance brands, one of which is Tokio Marine Insurans (Malaysia) Berhad. ELK-Desa’s furniture trading business, which started operations in mid-2015, is currently focused in the wholesaling of home furniture in the domestic market.
Due to growth in revenue and earnings, the company’s stock has risen over 33% in the year to date. I decided to attend its 2019 AGM to learn more about the company.
Here are 10 things I learned from the 2019 ELK-Desa Resources AGM:
1. Revenue grew 19% year-on-year to RM123.4 million in FY2019 (ended 31 March 2019) from RM104.1 million in FY2018. This was contributed by growth in both the hire purchase financing and furniture businesses. Revenue has grown at a compounded annual growth rate (CAGR) of 21% in the past five years after the company’s maiden foray into the furniture trading business in FY2016. Revenue for the hire purchase financing division grew 16% to RM84.9 million in FY2019 from RM73.1 million in FY2018, driven by a 17% growth in hire purchase interest income to RM73.0 million from RM62.3 million last year, accounting for 86% of the segment’s revenue. The remaining 14% of segment revenue is derived from income from insurance services provided to hire purchase customers, which increased 17% y-o-y.
2. Profit before tax increased 24% to RM43.8 million in FY2019 from RM35.3 million in FY2018, while basic earnings per share grew 13% to 11.2 sen from 9.9 sen. This was mainly attributable to the strong performance from the company’s hire-purchase segment, which accounted for 98% of group profit before tax in FY2019.
3. Net hire purchase receivables grew 22% y-o-y to RM490 million in FY2019. This was partly driven by the management’s decision in the past two years to expand loan size to a maximum of RM35,000 — from the threshold of below RM20,000 previously — to include a larger range of vehicle models. Net hire purchase receivables have grown at a CAGR of 14% over the past five years.
4. The growth in hire purchase receivables was mainly financed by bank borrowings, which increased 126% to RM114.3 in FY2019. Even so, ELK-Desa’s gearing ratio remains low at 0.28. The move to increase leverage has resulted in improvements in earnings and return on equity which improved to 8.1% in FY2019 from 7.1% the previous year.
5. The Minority Shareholder Watch Group (MSWG) asked if the management had an ‘optimum’ gearing position and whether it would continue to increase borrowings in the near term. Management answered that it was comfortable with a gearing ratio of 3.0, implying a potential for a substantial increase in leverage. As a comparison, CFO Teoh Seng Hee mentioned that peer companies in the financing industry have gearing ratios exceeding 4.0. An example is Aeon Credit Services Berhad which has a ratio of 4.0.
6. On the quality of its hire purchase receivables, ELK-Desa’s non-performing loans ratio improved to 0.8% in FY2019 from 1.0% last year. Loan loss coverage also improved slightly to 359% from 342%. However, cost-to-income ratio for the hire purchasing segment increased to 28.0% from 24.1%, as the company recruited a larger workforce (a significant proportion of which is for the credit recovery team) and increased staff development expenses to support growth in the hire purchase portfolio.
7. The furniture trading segment, which commenced operations in July 2015, is still a small and non-core business of the group. Segment revenue grew 24% to RM28.5 million, representing 31% of group revenue. However, the division contributed a profit before tax of just RM0.96 million, which is only 2% of group profit before tax. Management explained that the business has yet to generate sufficient volume to reach the optimum point of efficiency and achieve economies of scale.
8. On the company’s future plans, the management intends to maintain the positive growth momentum of the hire purchase portfolio and estimates a 10-15% growth rate in the next few years. Secondly, the management plans to maintain the company’s niche as a hire purchase financier for second-hand motor vehicles. Finally, it aims to leverage up to support hire purchase business growth for the next five years.
9. As part of ELK-Desa’s strategy to increase its leverage in order to grow its hirer base, the company established a medium-term notes (MTN) programme of up to RM1 billion in nominal value with a tenure of 10 years via Premier Auto Assets Bhd — a special purpose vehicle set up as the issuer. The first tranche of senior MTNs totaling RM105 million was successfully issued in July 2019. The tranche consisted of RM85 million of Class A MTNs rated ‘AAA’ and RM20 million of Class B MTNs rated ‘AA3’. The CFO said that the MTN programme provides a cost-effective and viable source of financing through the debt capital market. He further revealed that the interest on the notes (below 5%) is lower than what the company pays on bank borrowings (5.2% – 5.5%).
10. The MSWG asked more about the management’s strategies to sustain the growth of the hire purchase business. They replied that the used car segment and the company’s market share is small when compared to the new automobiles hire purchase market. As at 31 March 2019, the hire purchase segment has a hirer base of approximately 38,500 individuals, with an average net hire purchase receivables per hirer of RM13,000. The size of the hirer base is less than 1% of the total number of passenger cars registered in Kuala Lumpur and Selangor, suggesting a large potential untapped market. Management mentioned that the company could also grow net hire purchase receivables by increasing the maximum loan size above RM35,000.
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