Monday, March 12, 2012

RCE Capital: Low PE may not mean good value

If you are looking for a really low PE stock, RCE Capital stands out. At its current price of RM0.50, it is trading at PE of below 3.5x! Low enough? I am not too sure of another company in Bursa with such low PE except for some companies with one-year wonder performance.

RCE Capital is not a one-year wonder. It in fact has fantastic growth. Just look at its performance below:

Despite having those growth and such low PE, why is RCE still languishing at 50 cents. Here is a company which 5 years ago Kenanga, Aseambankers (Maybank IB) put a price tag of RM1.20 to RM1.30.

RCE Cap's price never touch RM1.20. Look below.

Why is it languishing? We probably have to trace back to what RCE does and where is its competitive advantage as a business.

RCE is a moneylender which provides hire purchase and personal financing loan to government employees. It is quite unique in the sense that it is the only listed non-financial institutions that provide financial assistance to government servant such as teachers and police. It ties up with with three co-operatives: Koperasi Wawasan Pekerja-pekerja Bhd, Koperasi Sejati Bhd and Koperasi Belia Nasional Bhd.

In minimizing non-performing loans, monthly collections are done via deductions from salaries of these workers. So who are its main competitors? Bank Rakyat, Bank Simpanan Nasional. In fact RCE is so small compared to these two that it only manages to capture less than 2% of the market. In most reports provided by analysts, they mentioned potential upsides which are the low NPL and market share which is a huge potential to RCE.

Here, I would like to highlight 2 main areas which RCE is struggling with.
Cost of funds
  • While RCE is a moneylender, it is also a borrower. Unlike BSN, RCE's Cost of Funds is not low as it is a non-deposit taking company. The funds that it uses to lend to the government comes from its own equity raised and bond. Against its other main competitor, such as BSN and Bank Rakyat, it loses out here. When your costs are higher than your competitors (and in this case it has no choice due to law and circumstances), overtime it will lose out.
High Rate of financing
  • Financing rate RCE charges to its borrowers are around 11 - 12%. What is the market rate charges by the banks to the public? 8%, 9% or even at most 12%. (I would like to think that) Government servants are not stupid. They will find out and look for other means of financing over time although in the short run they may find the ease of getting financing from RCE, Bank Rakyat attractive.

In any case, as in the announcement below, it already shows that KOWAJA is not happy with the terms of financing from RCE. 

RCE wishes to inform that Koperasi Wawasan Perkerja-Pekerja Berhad (“KOWAJA”) had on 8 June 2011 advised that KOWAJA has received approval from Suruhanjaya Koperasi Malaysia (“SKM”) to obtain funding from RCE Marketing Sdn Bhd (“RCEM”), a wholly-owned subsidiary of RCE, subject to a limit of RM200 million (the “Approval”).  KOWAJA is currently the largest borrower of RCEM. KOWAJA provides personal loans to its members who are primarily in the civil service.   
The Approval is subject to stringent operational, funding and other conditions. The funding conditions comprise pricing cap, security/collateral restrictions and structuring limitations. KOWAJA is confident of meeting the operational requirements of SKM and will work towards continuously complying with them going forward.  
RCE does not expect the Approval to have any material financial impact to the Group for the financial year ending 31 March 2012 and on its ability to meet interest and principal payments in respect of its debt obligations.  
However, the impact on the prospects of RCE is dependent on market conditions as well as industry and regulatory developments.   

Despite having written the above, RCE will not lose out immediately in the short run as it will still continue to enjoy the profits it has already lent out some of the funds to its borrowers and government servants may still continue to borrow from them. RCE is still attractive from the perspective of its earnings in future vs the share price. Price to Book Value (Below 1) is attractive as well. Despite the setback from the KOWAJA issues, the effect will only be felt few years down the road. However, as long as it continues to charge higher than the market rate and its costs remain higher than its competitors, this is not a long term stock.

Market anyway probably know this well already, as in the share price.

Serious Investing! 



Anonymous said...

KOWAJA is a sister company to RCE. The problem that RCE is facing is with SKM the regulator whom imposed a RM200m limit on RCE lending to KOWAJA thus affecting its growth. Nevertheless even at RM200m limit, RCE is still very profitable and with interest rate not going to move up any time soon for the next 3 years, the margin should point to a higher ROC. At 47sen it gives a decent 3% dy and 30% discount to its nta. We may wait for a lower price to improve the margin of safety and the opportunity to do so is coming soon. The trick is to know how to get in cheaper ;). The catalyst will be when the limit are lifted up or revised upwards. (Note:Yes, i'm long RCECAP )

felicity said...

If you are following Benjamin Graham's value investing, then RCE Capital would probably be his favorite. :)
I do not think KOWAJA is a sister company to RCE though.