(Feb 16, RM1.60)
Maintain buy with a higher target price (TP) of RM1.95: RCE Capital Bhd’s third quarter of financial year 2017 (3QFY17) earnings continued to be strong, aided by a still robust net loan growth of about 14% year-on-year (y-o-y) and net interest margin (NIM) expansion, mitigated in part by higher credit costs.
We raise our FY17 to FY19 earnings forecasts by 15% to 21%, and now project higher return on equity (ROE) of 15% to 16% over this period. Correspondingly, we have raised our TP to RM1.95 from RM1.60, pegged at a higher price-to-book value (P/BV) of 1.5 times (1.3 times previously).
3QFY17 core net profit of RM16.5 million (+27% y-o-y; -10% quarter-on-quarter [q-o-q]) took nine months of FY17 core net profit to RM52.4 million (+61% y-o-y). This was above expectations at 98% of our previous full-year forecast with the outperformance coming from better-than-expected interest margins.
Core net profit slipped 10% q-o-q, on the back of higher credit costs, mitigated in part by higher net interest margins. Net loan growth was moderately slower at 14.3% y-o-y (from 16.7% y-o-y in 2QFY17). Reported 3QFY17 net profit was a higher RM21.8 million (+67% y-o-y; +18% q-o-q) on a much lower effective tax rate of just 8%, the product of tax over-provision write-back during the quarter.
Taking into consideration the still strong momentum in earnings, we have raised our FY17/FY18/FY19 earnings forecasts by 21%/16%/15% respectively. While we have trimmed our FY17 to FY19 loan growth expectations to 11%-13% from 11%-16% previously, we have raised our interest margin estimates and lowered our credit cost assumptions to reflect a still benign credit environment, but on expectations that credit cost would still rise from about 2% in FY17 to 2.3% in FY19.
With the upward revisions of earnings forecasts, we now expect RCE Capital to generate a higher ROE of about 16.1% in FY18 (versus 14.5% previously).
Valuations are still undemanding with the stock trading at an attractive FY18 price-earnings ratio of just 7.2 times and a P/BV of 1.1 times. — Maybank IB Research, Feb 16