As a matter of fact, RCECAP is indeed a slow crawling kraken in the deep "finance" ocean. Global markets are cheering with the clear result of U.S new elected President Biden win and positive "effect" from vaccines, also the very much-relieved announcement from Bank Negara supporting the idea to preserve banks' capital and liqudity buffers instead of reimposing the loan moratorium greatly benefited the FBMKLCI to rebound from below 1500pts to test the ceiling of 1600pts.
This means finance sector is the biggest beneficiary from all of the recent news which boosted the sector to valued at P/E of 12.0 Thanks to short term investors/traders are avoiding this kraken due to its low volatility in price, RCECAP is super undervalued with P/E of less than 7.0. To recap, this kraken is bulletproof from all the negativities, eg. Covid-19 and Loan Moratorium.
Lets break it down:
1. Fantastic Business Model:-
RCE is viewed by many investors/traders as common money lender with the luck of obtaining approval from Bank Negara, little did they know RCECAP is a subsiary of AMCORP Group in which also owns AMBANK as one of the biggest bank in Malaysia.The business model is attractive due to its position as NonBank Financial Institution with majority of their clients/customers are civil servants. The repayments are done through a Salary Deduction Scheme whereby the installment payments are deducted from the salary on a monthly basis, just exactly like EPF contribution on a monthly basis. Hence, the risk of loan impairment is substantially reduced in their balance sheet.
2. Strong Net Interest Margin (NIM):-
RCE stands at an attractive position as it is benefiting from the low interest rate environment towards cheaper cost of funding. The Group financed via Sukuk programme with average rate of 3% ~ 5% and repackaged them as consumer/commercial financing to their clients with the rate up to 12%. This will greatly improve RCE's net interest margin up to 8% which is super attractive in the business.
3. Constant Growth in Dividend:-
RCE has a stable dividend payout ratio ranging from 20 - 40%. Given its revenue and net profit steadily growth at CAGR 11.72% and 22.82% respectively, constant growth of dividend per share at 2.00sen annually is achievable. Gearing ratio of 2.1x is manageable and lower than its peers' average of 4.8x
4. Invulnerable from Covid-19/Loan Moratorium/MFRS9:-
The Group remains competitive since the Covid-19 outbreak in Malaysia. Since then, Malaysia Government pledged to restart the economy by supporting both private and public sector via various policies/funds. Notably, loan moratorium is implemented during the outbreak which negatively affecting all the banks' earnings. However, RCE seems to be nullified from the moratorium due to its Nonbank Financial Institution status and also guranteed employment for civil servants. More importantly, the repayment scheme business model has also benefited the Group from the implementation of MFRS9(ECL). The new accounting standard affecting financial institutions' earnings caused by more comprehensive calculation for loan impairments especially on the effect from loan moratorium. However, RCE stands at favourable position thanks to the repayment scheme business model in which neutralized the loan impairments impact.
5. Forecast Growth/Earnings:-
Based on current market outlook, RCECAP registered a higher revenue of RM140.6mil (+2.6% YoY) in 1HFY2021, primarily led by the increase in early settlement income arising from higher refinancing activities by customers. We are expecting RCECAP to register a higher revenue of RM175.1mil (+20.3% YoY) for 2HFY2021 ramping up total revenue of RM315.7mil (+11.7% YoY) translating net profit of RM116.1mil at 36.73% profit margin with EPS of 33.38sen for FY2021
Expecting a fair value of RM2.60 for RCECAP. The valuation is based on P/E of 7.8x for FY2021 EPS of 33.38sen. RCECAP is valued at conversative historical average P/E of 7.8x which is relatively low as comapred to its sector average rate P/E of 12x and FBMKLCI P/E of 23x
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