RCE Capital - BUY - 28 Aug 2008

RCE Capital - 1QFY09 results within expectations (Results Note)



Price: RM0.47

Target Price: RM1.00

Recommendation: BUY



· RCE Capital's (RCE) 1QFY09 net profit of RM13.6m is in-line with our expectations comprising 21% and 20% of our forecast and consensus estimates respectively. Hefty revenue growth was dampened by higher operating expense from branch expansion and intensive marketing efforts.

· YoY, higher operating expenses in 1QFY09 dented sizeable increase in loan financing revenue. Revenue increased 68% driven by an 11% increase in net loan receivables as consumers sought alternative financing to cope with higher food costs and other inflationary pressures. EBIT only increased by 16% however due to a 28% increase in operating expenses, particularly in marketing and staff costs.

· QoQ, 1QFY09 core net profit declined by 16% in spite of a 31% increase in revenue mainly due to higher operating costs incurred to enlarge RCE's distribution network and incentivise co-operative agents that distribute its products.

· Maintain FY08 and FY09 earnings estimates. We anticipate stronger earnings growth moving forward as consumers seek alternative financing to cope with inflationary pressures and with seasonally higher demand in 2QFY09 just before the Hari Raya festive season.

· Re-iterate BUY recommendation with target price of RM1.00 derived from the application of 10x PER (1x below regional average) applied to FY09 FD EPS of 9.1 sen. The stock is trading at highly undemanding 5.1x and 4.4x FY09 and FY10 PERs respectively. Biggest downside risk is severe economic slowdown. Potential upside from rising demand due to consumers' shrinking disposable income with elevated food and fuel costs. RCE's NPL ratio remains below 3% and is unlikely to rise given RCE's civil servant customer base (low turnover) and collection of loan repayments via direct salary deduction.