Price: RM0.64
Target Price: RM0.90
Recommendation: BUY
· RCE’s 1HFY10 net profit of RM37.4m was in-line with expectations, constituting 48% of our estimates and 49% of consensus’ forecast. Robust loan demand from civil servants and new product launches sustained 1HFY10 earnings growth of 25%. We anticipate a stronger 2HFY10 earnings based on seasonality.
· Strong loans growth YoY with 1HFY10 net loan receivables up by 30% to RM1.05b. Warm reception to a new 15-year product that was introduced in September and resilient loan demand from civil servants supported a 25% increase in revenue that flowed through to a corresponding 25% increase in net profit. NPL ratio is still below 3%.
· Product diversification compensates for lower sales QoQ. 2QFY10 revenue was 11% lower QoQ as loan book rose by a slight 5% QoQ, reflecting slower economic growth and increasingly competitive environment. The company’s efforts to diversify its product portfolio with the launch of new Islamic products with tiered interest rates resulted in improved profitability however, as shown by the 4% expansion in EBIT margin. The higher-margin product mix, lower finance costs and taxation resulted in group net profit registering a slight 2% increase. Higher doubtful debt provision of RM12.2m (more than double QoQ) in 2QFY10 to bring it closer to 2QFY09 level of RM16.3m after an especially low provision in 1QFY09.
· Private placement raised RM39.1m. 71.1m new shares were placed out on 10 August 2009 at RM0.55 (at a discount of 17.5% to the day’s closing share price of RM0.667). The proceeds were used for working capital to fund loans growth.
· FY09 and FY10 earnings estimates unaltered.
· BUY recommendation maintained with target price of RM0.90, predicated on 9x PER applied to FY10 EPS of 10.0 sen. FY10 dividend yield of 1.6% maintained. We like RCE for its first-mover advantage in the niche civil servant financing segment, low NPL ratio and loans growth and believe it is undervalued at 6.4x FY10 PER.
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