RCE Capitals latest earnings were within expectations but dividends missed a target says Maybank Investment Bank in its review of the group's second quarter results.

Earnings and dividends estimates are unchanged as the house expects the 2HFY3/25 operating environment to be a lot better due to the civil service salary hike. That said, it also maintains its MYR1.45 TP based on 2.4x end-FY25E P/BV. With >10% downside risk, and downgrade RCE to SELL. In its view, the current share price has priced in most positives in anticipation of the upcoming civil service salary hike.

Earnings within but dividends below expectations
2QFY25 net profit of MYR27.8m (-27% YoY, -8% QoQ) brought 6MFY25 net profit to MYR58.2m (-23% YoY) which accounted for 40% of FY estimate. Maybank deems the results to be within expectations as 2QFY25 was suppressed by a MYR5.2m Employee Share Scheme (ESS) expense. Ex-ESS expense, 6MFY25 net profit would have come in at MYR63.4m or 43% of FY
estimate. Yet, the first interim DPS of 3sen (-1.0sen YoY, -0.5sen HoH) fell short as 76% DPR was employed (MIBG forecast: 80%

Operating environment still challenging...
Less financings were disbursed as the credit quality of new applicants have been poor. In an industry wide trend, many accumulated massive debts through 'compressed' financing by borrowing from multiple financial institutions nearly simultaneously. Gross financing receivables eased another 1% QoQ to MYR2.06b and non-performing financing ratio inched
up another 10bps QoQ to 4.3%. That said, the trailing 4 quarters credit cost ratio stabilised at 1.5% after 3 consecutive quarters of increases. ... but ought to improve with civil service salary hike.

Future quarterly earnings ought to be higher as RCE stated that no more
ESS expenses will be recognised for the remainder of the FY. Moreover, gross financing receivables growth ought to accelerate from 1 Dec 2024 due to the upcoming civil service salary hike. There is a strong correlation between government emoluments and RCE' gross financing receivables. The house forecasts RCE's gross financing receivables to grow by 15% over 2 years from Dec 2024.