RCE Capital - BUY - 27 May 2008

RCE Capital - FY08 results right on the money (Results Note)



Price: RM0.62

Target Price: RM1.20

Recommendation: BUY



· RCE Capital's (RCE) FY08 core net profit of RM54.0m was in line with our forecast of RM51.9m and consensus estimate of RM53.6m. The slight 4% discrepancy between actual FY08 net profit excl. EI and our estimate was due to an impairment loss of RM3.4m from RCE's participation in a Collaterised Loan Obligation (CLO) programme.

· The loan financing business was the main driver of the 16% YoY increase in FY08 core net profit, with net loan receivables growth of 34% spurred by civil servants' salary hike in July 2007. Revenue from the factoring division also increased by more than 3x, which offset the decline in investment holding income (due to the disposal of 23.2m units of AmFIRST REIT in FY07).

· FY08 EBIT margin declined due to higher marketing expenses incurred on incentive programmes for the co-operative agents that distribute RCE's products. RCE rewarded agents with incentive trips for example, to motivate performance and counter stiff competition from Bank Rakyat and other commercial banks that have entered the civil servants' consumer financing market.

· 4QFY08 net profit excluding EI of RM16.1m grew by 1% YoY and 7% QoQ due to higher net loan disbursements by the loan financing and factoring segments.

· Final gross dividend per share of 1.0 sen announced translates into a FY08 dividend yield of 1.6%, on par with that of FY07.

· Tweaking FY09 and FY10 net profit estimates upwards to take into account lower corporate tax rate of 26% and 25%, resulting in FY09 and FY10 EPS increasing by 3% for both years. Anticipate FY09 net profit growth of 20% with sustained demand for loans boosted by the extension of government employees' retirement age to 58 years.

· Maintain BUY recommendation with revised target price of RM1.20 derived from previous 13x PER (regional industry average) applied to FY09 EPS of 9.1 sen. Continue to favour RCE for its niche civil servant customer base, low default risk with direct salary deduction and potential growth from factoring.





KENANGA INVESTMENT BANK BERHAD (15678-H)