By Stella Goh – Market Data Analyst | 3 April 2020
Overview
ELK-Desa Resources Berhad (ELKDESA) is an established Malaysia-based investment holding company founded in 1989 and is headquartered in Kuala Lumpur. ELKDESA started its hire purchase financing operation in 2004, in view of continued growth of the automobile industry as well as rapid urbanization taking place throughout the country reflecting Malaysia’s progress towards a high-income nation. ELKDESA’s core focus area was in the under-served hire purchase financing for used motor vehicles. Over the years, the company has successfully established a strong presence and reputation in this segment.
ELKDESA was listed on Main Market of Bursa Malaysia on 18 December 2012. This significant milestone provided the company with the impetus to expand even further in a dynamic and sustainable manner.
Business Model
ELKDESA is involved in two business segments that provide products and services targeted at the consumer market. They are hire purchase financing and other integrated services for used motor vehicles and furniture trading.
The company’s hire purchase financing division remains its primary business activity and income generator through its subsidiary called ELK-Desa Capital Sdn Bhd. The company has carved a strong presence as a reputable lender in the used motor vehicle sector specifically targeting buyers who are seeking small value financing. As an extension of its hire purchase financing business, ELKDESA also cross-sells general insurance products to its hire purchase customers. These products are mainly from leading insurance providers such as Tokio Marine Insurance (Malaysia) Berhad and Berjaya Sompo Insurance Berhad.
Besides that ELKDESA is also focused in the wholesaling of home furniture in domestic market under its subsidiary ELK-Desa Furniture Sdn Bhd. The company has four furniture retail showrooms located in Klang and Shah Alam and has started to distribute its furniture products to more than 800 furniture retailers throughout Malaysia. Although the furniture division is relatively new but is a growing business venture that has the potential to contribute positively to ELKDESA’s earnings and growth in the foreseeable future.
Financial Review
Based on past 3 financial years’ revenue chart above its revenue grew year-on-year (y-o-y) from FY2017 (+47.25%), FY2018 (+10.20%) to FY2019 (+18.50%). On a CAGR basis, ELKDESA has grown 24.35% based on 3 years.
ELKDESA’s revenue was due to the higher contribution from both the company’s hire purchase financing business and furniture segment. According to the Annual Report for FY2019, hire purchase financing division remains its main income generator contributing 98% to the company.
ELKDESA has recorded a RM14.250 million increase in gross profit, translating to a growth of 16.82% from RM84.705 million in FY2018 to RM98.995 million in FY2019. Based on 3 years CAGR, the company’s gross profit has grown 18.84%.
The rise in gross profit was attributed to the net hire purchase receivables growth of a notable 22% to RM490 million as at 31 March 2019. This was one of the key factors that had led the Division’s increased revenue and gross profit. ELKDESA’s furniture division although icurrently a small and non-core business activity of the company has also contributed positively during the year. (Source: Annual Report 2019)
The Profit After Tax (PAT) of ELKDESA rose 26.97% from RM25.924 million in FY2018 to RM32.916 million in FY2019. Based on 3 years CAGR basis, the Profit After Tax (PAT) grew by 20.55% which was in line with the growth in revenue and gross profit.
Cash Flow Statement
The net cash from operating activities has provided a negative cash flow of (-RM53.977 million) in FY2019 as compared to (-RM25.689 million) in FY2018 as the hire purchase receivables and trade receivables increased in FY2019 compared to previous year.
The net cash from investing activities in FY2019 (-RM3.042 million) was mainly due to the purchase of Property, Plant and Equipment (RM4.477 million). The negative cash flow indicates that the firm is investing in its business for growth. (Source: Annual Report 2019).
The net cash from financing activities in FY2019 is RM38.165 million was mainly due to net drawdowns of block discounting payables amounting to RM63.938 million. The company also has to pay dividend (RM20.657 million) and interest (RM5.115 million) to its shareholders.
Is the company able to pay back its liabilities?
Based on the liquidity ratio calculation, ELKDESA has a current ratio of 2.449 times in FY2019 indicating that the company does not face any liquidity issue as it is capable of paying back its liabilities (RM71.901 million) if any unforeseeable circumstances occur. ELKDESA is able to do so by using current assets such as inventories, other assets, trade receivables, hire purchase receivables, other receivables, deposits, prepayments, current tax assets, short term funds, cash and bank balances amounting to RM176.123 million. However this may also indicate that the company is not efficiently using its current assets or its short-term financing facilities.
Prospect and Challenges
ELKDESA has announced its maiden medium-term notes (MTN) program of up to RM1 billion in nominal value to raise funds for the expansion of its used car hire purchase financing business. According to ELKDESA, the program with a tenure of 10 years will be done via its special vehicle Premier Auto Assets Berhad. The first tranche of the senior MTNs totaling of RM105 million, comprising RM85 million of AAA-rated Class A MTNS and RM20 million of AA3-rated Class B MTNs were issued on 19 July 2019 which are rated by RAM Rating Services Berhad.
ELKDESA aims to utilize the fresh funds to grow the hirer base of its used car hire purchase financing business, the primary business activity and main income contributor of the company. (Source: The Malaysian Reserve, 19 July 2019). According to the executive director and chief financial officer, Henry Teoh Seng Hee, MTNs will finance their growth. As such, they do not need to worry about insufficient funds to grow their hire-purchase financing business. With the MTNs, the company is expected to leverage up with its gearing ratio expected to almost double to 0.5 times in FY2020, up from 0.28 times as at March 31, 2019. (Source: The Edge Markets, 13 August 2019).
According to Affin Hwang Capital, they believe there are still ample opportunities for ELKDESA to tap into the used car market. Robust Proton and Perodua sales in 2H 2019 indicated that the mass market is not facing constraints, and that the bottom 40% and middle 40% income groups (B40 and M40) consumption spending is still intact.
The robust national car sales in 2019 were a good sign boding well for ELKDESA’s prospects. It is highly likely whenever the car owners (B40 and M40 groups) need to upgrade, they would first dispose of their existing cars in the used-car market. This is where the hire purchase financing players such as ELKDESA would finance and the transactions at rates of 8.75% to 10%.
Rating System
Return on Equity (ROE) = Average
Revenue [3 years CAGR] = Good
Net Earnings [3 years CAGR] = Good
Basic Earnings per Share (EPS) [3 years CAGR] = Good
Interest Coverage = Good
Quality of Earnings = N.A.
(*Unable to get Quality of Earnings because Net Cash from Operating Cash Flow is Negative Figure)
Insight
Based on the calculation of Discounted Earnings Model, ELKDESA has an intrinsic value of RM1.972. The current share price of ELKDESA is RM1.15 which makes it an undervalued stock (as at 2 April 2020). ELKDESA has a beta of 0.543 (500days) indicating that the share price is less volatile than current market. Based on the computation of Compound Annual Growth Rate (CAGR), ELKDESA has an expected market return of 0.45%.
In conclusion, ELKDESA has achieved a strong performance in FY20219 with the highest revenue, gross profit and profit after tax over the past 3 years. The company’s prospect remains bright as the MTNs program is also timely as higher purchase financing for the used car segment remains underserved, with the demand far out-stripping supply. Since ELKDESA has carved a niche as a reputable lender in Klang Valley, I believe it is well poised to drive further growth moving forward.
Disclaimers
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