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30 Jun 2018
The Star Online : Making money from money
 
Making money from money
The Star Online - BUSINESS NEWS  Saturday, 30 Jun 2018
By Tee Lin Say



Money lenders give decent return on investment

LENDING money is one of the best businesses to be in.

With loan growth on the rise after four years of slowing, and Bank Negara data showing that Malaysia is finally on track to accelerate in 2018, one of the best sectors to look at will be credit and money-lending companies.

Mostly unnoticed are non-bank financial companies, which appear to be quietly thriving despite all sorts of headwinds, fears of new competition and economic uncertainties.

Over the last five years, their valuations remain modest despite their steadily increasing earnings.

Dividend yields are also decent.

Time then to look at Aeon Credit Service (M) Bhd and RCE Capital Bhd.

RCE Capital

Meanwhile RCE Capital is controlled by prominent banker Tan Sri Azman Hashim, who owns a 58.6% stake via Amcorp Group.

Its subsidiaries are involved in financial services, while its earnings are predominantly derived from its consumer financing segment. Over the last five years, its net profit has grown at a compounded annual rate of 52.04%.

At its current price of RM1.51, it trades at a forward PER of only 5.7 times and has a market capitalisation of RM511.7mil. Based on the seven sen dividend given out for its financial year (FY) ended March 31, 2018, this translates to a dividend yield of 4.6%.

RCE Capital pursues growth organically by expanding its loan base primarily in the consumer financing segment as financiers of cooperatives and foundations. Emphasis is placed on its turnaround time and a prudent approach on its loan classifications and recognition. It adheres strictly to a debt service ratio of 60% and is more selective in its lending criteria.

For its fourth quarter ended March 31, 2018, net profit was up 8.36% to RM23.02mil on the back of a 10.46% jump in revenue to RM63.24mil. It also declared a four sen dividend.

The better results were primarily led by higher interest and fee income backed by the expanded loan base from its consumer financing segment.

For the full year (FY18), net profit was up 12.33% to RM88.68mil while revenue was up 10.1% to RM245.91mil. Full-year dividends amounted to seven sen, which translates to a payout of 27%. At its current share price of RM1.51, this would imply a dividend yield of 4.6%.

RCE Capital’s loan base of RM1.5bil is also an increase of 11.6% compared to a year ago. This translates to a double-digit growth for the third consecutive year as it has gradually rebuilt its portfolio since 2014.

According to Maybank Research, the stock is trading at an estimated FY19 price-earnings ratio of just 6x and a price-to-book value (P/BV) of 0.9x and a return on equity of just 16.8%.

“Valuations are undemanding for RCE, especially since dividend yields are also a decent 4.5%. There is room for growth since RCE commands a market share of just 1.5% of the civil servant financing market,” it says.

Maybank Research has maintained its Buy call with an unchanged target price of RM1.76, pegged to a 2019 calendar year P/BV of 1x.

The research house opines that there is still much room for growth

“Based on our estimates, with a loan receivables book of just RM1.5bil, RCE’s market share of the civil servant financing market is just 1.5% and with 75,000 borrowers in its portfolio. This accounts for just about 5% of the civil servant workforce.

“Even if the size of the civil service is capped, there is still room for growth we believe, especially since some of the lenders have scaled back on such activity. We project more moderate loan growth of 6%-7% per annum over the next three years for RCE,” it adds.

At the same time, RCE Capital’s sukuk bonds account for 59% of the group’s total funding, which is positive. This is because it allows RCE Capital to lock in a substantial part of its funding at fixed rates over the longer term.

“With a net gearing ratio of 2.2x, there is still much room to leverage up,” it says.

According to Bank Negara, personal financing accounted for 14.6% of the total household debt as at end-2017.

Maybank Research says this essentially implies that as at end-2017, personal financing amounted to about RM167bil of the total household debt of RM1.14bil.

“Of the RM167bil market, Bank Rakyat commands an estimate 38% market share, by our estimates. Commercial banks, ex-Bank Islam, make up another 34%, with Bank Islam and Bank Simpanan Nasional (BSN) accounting for 7% and 6% respectively. With an outstanding receivables book of RM1.6bil, RCE’s market share is just 1%,” says Maybank Research.

Of these players below, Maybank Research says the largest lenders to the government civil service would be Bank Rakyat, Malaysia Building Society Bhd (MBSB) and BSN, while the commercial banks are not large players in this space.

“As it stands, lending to civil servants has been slowing, especially since lenders have been encouraged to adhere more strictly to a debt service ratio of 60%. RCE’s loan book expanded at a more moderate pace of 8% in FY18, from 12% in FY17, and we forecast more moderate growth of 7% in FY19 and 6% in FY20,” it says.

While it is aware the civil servant workforce could stagnate, if not shrink, under the current government, it considers RCE Capital still as a small player in the civil servant financing space.

“There is market share to be gained, especially since players such as MBSB have turned less active in this space,” it says.