This article first appeared in The Edge Malaysia Weekly on September 16, 2024 - September 22, 2024

For the third straight year, RCE Capital Bhd (KL:RCECAP) has won The Edge Billion Ringgit Club (BRC) award for highest returns to shareholders over three years among companies in the financial services sector with a market capitalisation of below RM10 billion.

The share price of the group, which specialises in providing financing solutions for civil servants in Malaysia, rose 168% over the BRC awards’ three-year evaluation period. Its adjusted share price increased from RM1 on March 31, 2021, to RM2.68 on March 31, 2024, translating into a three-year total return compound annual growth rate (CAGR) of 38.8%.

The share price appreciated with RCE’s commitment to paying better dividends even as its net profit grew steadily from RM110.6 million in FY2020 to RM124.6 million in FY2021. Thereafter, net profit grew to RM133.2 million in FY2022 and RM138.8 million in FY2023, translating into a risk-weighted three-year profit after tax CAGR of 7.9%.

On May 23, 2023, RCE announced that it was adopting a new dividend guidance, setting a payout ratio of between 60% and 80% from the financial year ended March 31, 2024 (FY2024), provided it does not compromise on its cash-flow requirements. Previously, RCE’s payout policy since FY2019 had been 20% to 40% of profit after tax.

RCE’s share price spiked to as much as RM3.40 on Jan 24, 2024. Although the share price slipped to RM2.68 two months later on March 31, the counter regained ground to close at RM3.33 on Aug 14. On Aug 15, however, some of those gains were erased after RCE announced that day that its net profits in the first quarter ended June 30, 2024 (1QFY2025), had slipped 17.8% year on year to RM30.3 million from RM36.9 million previously, owing to higher allowances for impairment losses on receivables. The counter closed at RM3.25 on Aug 27, valuing it at RM2.38 billion.

Despite a weaker start to FY2025, RCE says it remains optimistic about maintaining profitability for the rest of the year. It will prioritise quality financing growth and prudent credit risk management to ensure long-term sustainability.

Both Maybank Investment Bank and PublicInvest Research maintained their “hold” call and respective target prices (TPs) of RM3 and RM3.18 on RCE, following the 1QFY2025 release.

According to Maybank, the worst is probably over for RCE and its future quarterly earnings are expected to improve. This is because the civil service salary adjustments announced on Aug 16 are likely to be positive for RCE’s financing growth, the bank says in an Aug 16 report.

“Our earnings estimates and TP are premised on financing receivables growing an average of 15% for 12 months from Dec 1, 2024. Thus, there could be upside to our estimates and TP should the average growth in civil service salaries be larger than our imputed 15%,” it says.

On Aug 16, Prime Minister Datuk Seri Anwar Ibrahim, who is also the finance minister, announced that civil servants’ salaries would be increased by up to 15% for the executive, management and professional groups.

These hikes are spread out over two phases, with the first phase being an 8% increase on Dec 1, 2024. The second increase of 7% will be effective Jan 1, 2026.

Meanwhile, RHB Research has maintained its “sell” call on RCE with a higher TP of RM2.70 (versus RM2.40 previously), following the 1QFY2025 earnings release that came in just under one-fifth of consensus earnings estimates for the full year.

“The impending salary increase for civil servants could lead to an acceleration in financing growth, though we note that this is set to take effect only in December 2024, or late 3QFY2025 for RCE. We continue to forecast receivables growth in the mid-single digits for the group, with a pickup in FY2026,” RHB says in a note dated Aug 16, which acknowledges that RCE’s “longer-term prospects look good, as it is a prime beneficiary of the revision to civil service wages, though near-term challenges remain”.

In the group’s 2024 annual report, RCE chairman Shahman Azman says: “It is crucial to acknowledge the prevailing uncertainties in global and local economies, which demand our careful attention and strategic response.

“As we navigate the uncertain global and local economic landscape and inflationary pressures, we will continue recalibrating our strategies, including prudent financial management, proactive risk mitigation and strategic foresight for sustainability and long-term value creation for stakeholders.”

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