Introduction

RCE Capital Bhd, a key player in the Malaysian financial sector, is under the microscope as Maybank Investment Bank Berhad presents a detailed analysis of its recent financial performance and market position. This report dives deep into the company’s earnings, operating environment, and future prospects, providing investors with essential insights and strategic recommendations.

Financial Performance Overview

RCE Capital Bhd has experienced a notable shift in its financial dynamics, with its 2QFY25 net profit standing at MYR27.8 million, marking a significant decline of 27% year-on-year and 8% quarter-on-quarter. Despite these figures aligning with expectations, the dividends have not met the anticipated levels, primarily due to a 76% Dividend Payout Ratio (DPR) compared to the forecasted 80%.

Challenges in the Operating Environment

The current operating environment presents challenges, particularly in the quality of credit among new applicants. A prevalent industry trend has seen many individuals accumulate substantial debts through ‘compressed’ financing, borrowing from multiple financial institutions simultaneously. This has resulted in a slight easing of gross financing receivables by 1% quarter-on-quarter to MYR2.06 billion, alongside a 10 basis point increase in the non-performing financing ratio to 4.3%.

Future Prospects with Civil Service Salary Hike

Looking ahead, RCE Capital anticipates an improvement in future quarterly earnings, attributed to the exclusion of Employee Share Scheme (ESS) expenses for the remainder of the fiscal year. Additionally, the upcoming civil service salary hike, effective from December 1, 2024, is expected to accelerate gross financing receivables growth by 15% over two years.

Market Position and Strategic Recommendations

RCE Capital is primarily involved in providing general financing services, with a particular focus on personal financing for civil servants. Despite a modest market share of approximately 2%, the company boasts a competitive edge with its rapid 48-hour financing processing turnaround time. The return on equity generation continues to surpass the average for the overall banking industry.

The report maintains a MYR1.45 target price, suggesting a downgrade to a ‘SELL’ recommendation due to a perceived downside risk exceeding 10%. The current share price appears to have already factored in most of the positive expectations from the anticipated salary hike.

Financial Metrics and Growth Forecast

RCE Capital introduced a superior credit scoring model in 2013, forecasting a 6% compound annual growth rate (CAGR) in gross financing over the next three years. Although the average cost of funds is rising, the average financing yields are increasing as well. The company recently enhanced its dividend payout ratio policy from 20-40% to 60-80%, reflecting a stable three-year forward core net profit CAGR of 6%.

Key Risks and Opportunities

While RCE Capital faces several challenges, including high household debt levels and the necessity to leverage due to its inability to take deposits, it also stands to gain from easing competition and potential access to the Credit Counselling and Debt Management Agency (CCRIS). A 25 basis point reduction in the cost of funds could significantly boost earnings by 3%.

Conclusion

RCE Capital Bhd is navigating a challenging yet promising landscape. With strategic adjustments and a focus on leveraging upcoming opportunities, the company is poised to enhance its market position. Investors are advised to consider the current market dynamics and strategic insights from Maybank Investment Bank Berhad as they weigh their investment decisions.