17 Feb 2017
The Star : RCE Capital valuations remain attractive
RCE Capital valuations remain attractive
Friday, 17 February 2017 

PETALING JAYA: Valuations remain attractive for financial services firm RCE Capital Bhd, which provides loans primarily to civil servants, on strong earnings growth potential.

Maybank Investment Bank Research has raised the company’s earnings projections for the financial year ending March 31, 2017 (FY17) to FY19 by 15% to 21% with a higher return-on-equity of 15% to 16% over this period.

However, the research house said due to the still benign credit environment, loans growth expectations had been trimmed to 11% to 13% from 11% to 16% previously.

It has also raised interest margin estimates while credit cost assumptions have been lowered. It expects credit costs to rise from about 2% in FY17 to 2.3% in FY19.

The company’s latest third quarter for FY17 saw robust net loans growth of about 14% year-on-year (y-o-y) and net interest margins expansion, mitigated in part by higher credit costs.

“RCE’s third-quarter core net profit of RM16.5mil (+27% y-o-y, minus 10% quarter-on-quarter) took nine months cumulative core net profit to RM52.4mil (+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,” it said.

It has raised the stock’s target price to RM1.95 per share from RM1.60, pegging it on a higher price-to-book value of 1.5 times from 1.3 times previously, noting that valuations continue to remain attractive and RCE continues to be rated a “buy”.

On a quarter-on-quarter (q-o-q) basis, profits dropped due to higher credit costs, mitigated in part by higher net interest margins.

“Net loans growth was moderately slower at 14.3% y-o-y (from 16.7% y-o-y in the second quarter).

“While reported third-quarter net profit was a higher RM21.8mil (+67% y-o-y, +18% q-o-q) on a much lower effective tax rate of just 8%, the product of tax over-provision writebacks during the quarter,” it said.

The research house now expects RCE to generate a higher return-on-equity of about 16.1% in FY18 from 14.5% previously.

“Our target price is raised to RM1.95 from RM1.60 on pegging on a higher calendar year 2017 price-to-book value of 1.5 times versus 1.3 times previously, which is still undemanding, in our view.

“This is given that at RM1.95, the stock would trade at a prospective FY18 price-to-earnings ratio of just 9.3 times,” it said.