CIMB Research sees value in RCE Capital

RCE Capital Bhd (9296), the financial services firm which provides consumer credit to civil servants, has a compelling upside CIMB Research said in a report recently, following a visit to the company.

In a research note, CIMB said RCE Capital could trade at between RM1.05 and RM1.20 a share based on 2011 consensus earnings per share estimate of 13 sen, which translates into an upside of between 59 per cent and 82 per cent.

CIMB expects net profit to swell to RM102.5 million in the financial year ending March 31 2012 from RM66 million in 2009.

In the current financial year, CIMB forecast RCE Capital to post a net profit of RM77.2 million, followed by a net profit of RM86.7 million in the following year.
"We see value in the company given its undemanding price to earnings and strong return over equity (ROE)", analyst Winson Ng Gia wrote in the report.

Although return on equity is set to fall to 21 per cent in 2011 from 26 per cent in 2009, it is still superior to the average of 16 per cent and 18 per cent for the banking sector.

RCE Capital currently has RM1.28 billion in total assets and a loan base of RM952 million, with interest income comprising 77.1 per cent of its total revenue and commission income making up 18.8 per cent of revenue.

According to CIMB, consumer financing accounts for 96 per cent of its loan base compared with only 2.5 per cent from the factoring operations.

More than 90 per cent of RCE Capital's loan book comes from personal loans to public sector employees via Angkatan Koperasi Kebangsaan Malaysia (Angkasa), a centralised collection agency for cooperatives in Malaysia.

With the assistance of Angkasa, monthly repayments are made through the deduction of borrowers' salaries. Furthermore, personal loans offer lucrative yields with interest rates of 10 per cent and 12 per cent, the research house said in the report.

Nevertheless, CIMB also notes that the key risk to RCE Capital is because of its success, most commercial banks are now trying to also encroach into the civil servant lending business, RCE's main income driver.

Commercial banks have the advantages of wider branch networks and comprehensive product range and because RCE Capital does not have a deposit-taking licence it will be much harder for the company to expand into other loan segments as it relies on debt financing, which means a higher cost of funds compared with commercial banks.