19 Feb 2020
The Edge : RHB Research raises target price for RCE Capital to RM2.20
RHB Research raises target price for RCE Capital to RM2.20
Arjuna Chandran Shankar  /

RHB Research raises target price for RCE Capital to RM2.20

KUALA LUMPUR (Feb 19): RHB Invesment Bank Bhd Research has maintained its "Buy" rating on RCE Capital Bhd with a higher target price (TP) of RM2.20 (from RM2.10) and said RCE Capital Bhd’s nine-month ended Dec 31, 2019 (9MFY2020) earnings had beaten estimates.

In a note today, RHB Research said RCE Capital’s valuation remains attractive, as it is currently trading at 0.8 times forecasted FY21 price to book value (P/BV).

It noted that its revised TP on the counter is a Gordon growth model (GGM) derived FY21 P/BV of 1.07 times against a projected average return on equity (ROE) during FY20 to FY22 of 16%.

According to , GGM is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate.

Moreover, RHB Research has made an upward revision of 4% for its earnings estimates on RCE Capital’s FY20 to FY21 to account for slightly higher other income.

RHB Research observed that RCE Capital saw a profit after tax and minority interests (PATAMI) of RM82.2 million in 9MFY2020, which accounted for 79% and 83% respectively of its and consensus estimates.

Year to date (YTD), pre-provision operating profit (PIOP) grew 9% year-on-year (y-o-y), mainly lifted by robust topline growth, with net interest income (NII) and non-interest income (non-II) growing 11% and 6% respectively.

While its operating expenditure (Opex) grew 13% y-o-y during the nine-month period, its overall cost-income ratio (CIR ratio) stood at 23.1%, an increase of six percentage points (ppts) y-o-y.

“Net earnings expanded faster y-o-y at 14.6%, thanks to 15% lower impairment charges. Credit cost improved to 112 basis points (bps) from 139bps over a year ago. Asset quality remained healthy, with both non-performing loan (NPL) and gross impaired loan (GIL) ratios down 15bps and 26bps quarter-on-quarter (q-o-q),” the research house noted.

In particular, business operations within the third quarter ended Dec 31, 2019 (3QFY2020) remained solid, with net interest income (NII) growing 4.7% q-o-q. This NII growth was buoyed by a 17bps expansion in its net interest margin (NIM).

RCE Capital also saw a lower cost of funds – mainly from a sukuk issuance – which contributed to the sequential improvement in margins, with its lending rate steady on a q-o-q basis.

Its CIR ratio improved around 260bps q-o-q to 20.3% on lower staff costs and other expenses.

As a result, its PIOP grew 7.6% q-o-q, while impairment charges fell 18% q-o-q. Additionally, quarterly annualised credit costs improved to 104bps, from 128bps seen in 2QFY2020. RCE Capital registered an ROE of 19.5% in 3QFY2020 versus the 18.1% posted in 9MFY2020.

Gross receivables did grow 5% y-o-y or 1.5% q-o-q to RM1.8 billion. The research house opined that RCE capital is set to achieve its mid-single-digit growth target for FY20 while noting that its management has not seen a slowdown in lending activities despite a softer macroeconomic environment.

”Applications remain robust, with no signs of a meaningful slowdown,” RHB Research stated.

That being said, the main downside risks to its recommendation on the counter include higher credit costs, and weaker net financing margins and growth in receivables.

As of 9:24 am, shares in RCE Capital were trading 3.55% or six sen higher at RM1.75, giving it a market capitalisation of RM651.3 million. It saw 1.91 million shares traded.