RCE Capital - 9MFY08 results on track

RCE Capital - 9MFY08 results on track (Results Note)
Price: RM0.58
Target Price: RM1.15
Recommendation: BUY



· RCE Capital's (RCE) 9MFY08 net profit of RM38.0m was within our expectations and slightly below consensus, comprising 73% of our RM51.9m FY08 net profit forecast and 70% of the RM53.6m estimated by consensus. 9MFY08 core earnings is up by 24% YoY spurred on by the July 2007 civil servants' pay rise.

· 9MFY08 core net profit bumped up by higher loan disbursements driven by the hike in government employees' salaries. YoY, 9MFY08 core net profit rose by 24% (compared to 9MFY07 core net profit of RM30.5m excluding 9MFY07 extraordinary items of RM20.4m from the disposal of AmFIRST REIT and the associated RM3.5m impairment) due to an approximate 20% increase in loans disbursed. 9MFY08 EBIT margin declined by a slight 4% due to higher interest expense associated with the fully-issued MTNs and higher commissions for co-operative agents.

· YoY, 3QFY08 core net profit increased by 16% on the back of 33% increase in 3QFY08 revenue spurred by the public service salary increase and aggressive marketing by RCE. Excluding exceptionals, the 3QFY08 EBIT declined by 10% partly due to higher interest applicable to revenue which grew proportionately to the larger amount of loans disbursed.

· QoQ, 3QFY08 net profit improved by 16% despite a 4% dip in 3QFY08 revenue due to the timing of loan demand. 2QFY08 revenue enjoyed the bulk of the increase in loan appetite coupled with aggressive marketing by RCE, surging by 24% QoQ.

· Maintain FY08 and FY09 net profit estimates of RM51.9m and RM63.1m respectively. Expect healthy demand for loans in FY08 by the low to middle income civil servants that are RCE's target market, as they look to raise cash to cope with rising inflation.

· Re-iterate our BUY recommendation with target price of RM1.15, obtained by utilising a 12x PER to previous FY09 EPS of 9.6 sen. At our target price, the stock would only be trading at 13x PER to FY09 EPS (excl EI) of 8.9 sen. We believe the company's growth prospects are intact, with the possibility of upside as it expands geographically.


KENANGA INVESTMENT BANK BERHAD (15678-H)
Research Department