RHB Research has initiated coverage on RCE Capital Bhd with a forecast net earnings growth of 8.7% and 5.5% in FY20-21 (March) on the back of a healthy expansion in receivables.
“Better borrower profiles should improve asset quality, although receivables growth may moderate,” says the research house in a report. The current 0.8x FY21F P/BV against >15% ROE is at an unjustified discount to that of peers which include AEON Credit Bhd,” it said.
The research house expected RCE’s gross receivables growth to moderate to 5% for FY20-21F from the 5-year CAGR of 10.5% seen during FY14-19, due to a shift in strategic focus. Customers with better quality are now preferred, and management does not intend to pursue high growth at the expense of asset quality.
It has ascribed a target price of RM2.10 based on 1.03x FY21F P/BV, which is approximately +1 Standard Deviation from its historical mean.
RCE Capital, which provides general financing services to civil servants, had recently undertaken a RM2 bil sukuk programme to improve funding cost. Three tranches totalling RM501 mil have been issued so far, with a 4.67% weighted average profit rate.
Compared with FY19’s cost of funds of 5.4%, RHB opined that this programme should help improve RCE’s overall funding costs and mitigate potential falls in lending yields.
The company’s unique salary deduction scheme to safeguard collection also augurs well as the company has a claim priority over other financial institutions on borrowers’ cash flows. This is via monthly salary deductions, which should better safeguard collection rates and result in gradual improvements in credit costs.
According to RHB, RCE’s NPL ratio has been stable at 4.1-4.4% in FY17-19, improving from a high 14-15% in FY12-13. Loan loss coverage remains comfortable as well, staying above 170% during the same period.
The research house said it does not expect either ratios to significantly deteriorate, given such proactive asset management.
The key risks for the company include high indebtedness levels which are especially prevalent among civil servants. RCE’s receivables growth may be capped, given the lower headroom for leveraging.
Regulators are also working to legislate the Consumer Protection Act, with the main purpose of promoting a prudent and responsible lending culture. Details are sparse at the moment, but RHB Research does not rule out the possible regulatory risks from this initiative.
The research house said despite the share price rising 8% post 2QFY20 results, RCE’s current valuation remains attractive, as it is still trading at below its book valuation.
At the mid-day break, RCE shares were traded at RM1.72, up five sen from the Jan 9 close, with 646,200 shares done. – Jan 10, 2020
