ELK-Desa’s Latest Quarter: Revenue Climbs, But Profits Face Headwinds
ELK-Desa Resources Berhad, a key player in Malaysia’s used-car hire purchase financing and furniture wholesale sectors, has just released its financial results for the first quarter ended June 30, 2025. The report paints a mixed picture: while the company successfully grew its revenue, profits took a significant hit. This signals a challenging operating environment, marked by rising credit risks and margin pressures. Let’s dive deep into the numbers to understand what’s driving this performance.
A key takeaway from this quarter is the 22% drop in pre-tax profit, despite a healthy 7% increase in revenue. This divergence is primarily due to a substantial rise in impairment allowances, a crucial metric for any financing business.
A Tale of Two Trends: Key Financial Highlights
At a glance, the top-line growth is encouraging, but the bottom-line figures tell a more cautious story. The company’s profitability was squeezed by necessary provisions for potential loan defaults, reflecting the current economic pressures on consumers.
Q1 2025 (Current Quarter)
Revenue: RM 49.25 million
Profit Before Tax: RM 8.58 million
Net Profit: RM 6.43 million
Earnings Per Share (EPS): 1.42 sen
Q1 2024 (Same Quarter Last Year)
Revenue: RM 45.88 million
Profit Before Tax: RM 10.99 million
Net Profit: RM 8.14 million
Earnings Per Share (EPS): 1.79 sen
The main reason for the 22% decline in pre-tax profit was a significant 35% increase in impairment allowances for receivables. In simple terms, the company had to set aside more money to cover potential losses from customers who might struggle to repay their loans. This was driven by slower repayments and lower recovery values from repossessed vehicles.
Breaking Down the Business: Segment Performance
ELK-Desa operates through two main segments: Hire Purchase Financing and Furniture. Both segments contributed to revenue growth, but both also saw their profitability decline.
| Segment | Revenue (Q1 2025) | Revenue Growth (YoY) | Profit Before Tax (Q1 2025) | PBT Change (YoY) |
|---|---|---|---|---|
| Hire Purchase Financing | RM 32.87 million | +7% | RM 8.20 million | -18% |
| Furniture | RM 16.38 million | +8% | RM 0.38 million | -61% |
Hire Purchase Segment: Growing the Book Amidst Rising Risks
The core hire purchase division continued its growth trajectory, with its loan portfolio expanding by 8% year-on-year to RM721.07 million. However, this growth came at a cost. The 18% drop in profit was a direct result of the higher impairment allowances needed to buffer against increased credit risk. The credit loss charge rose from 1.43% to 1.77%, indicating a tougher collections environment.
Furniture Segment: Sales Up, Margins Squeezed
The furniture segment saw an 8% rise in revenue, driven by strong domestic sales. Despite this, its pre-tax profit plummeted by 61%. This was attributed to a lower gross profit margin, which fell from 31% to 27%, and a 25% increase in other expenses, mainly related to higher shipping and distribution costs for expanding its presence in East Malaysia.
Under the Hood: A Look at Financial Health
To fund the expansion of its hire purchase portfolio, ELK-Desa increased its bank borrowings by 26% to RM380.2 million. Consequently, its gearing ratio—a measure of debt relative to equity—rose from 0.63 times to a still “manageable” 0.78 times. The company’s net assets per share remained stable at RM1.08. On a positive note, cash flow from operations turned positive this quarter, a significant improvement from the cash outflow recorded in the same period last year.
Navigating the Road Ahead: Risks and Company Strategy
The management acknowledges several macroeconomic and sectoral headwinds. Key risks include:
- Economic Uncertainties: Potential impacts from fuel subsidy rationalisation and rising living costs could further pressure consumers’ repayment capabilities.
- Global Trade Tensions: Rising shipping costs and supply chain disruptions could affect both business segments.
- Automotive Sector Shifts: The aggressive pricing of Chinese Electric Vehicles (EVs) is putting downward pressure on the prices of used internal combustion engine (ICE) vehicles. This is a critical risk, as it could lower the recovery value of repossessed assets in their hire purchase portfolio.
In response, ELK-Desa plans to continue its focus on sustainable growth within its niche, underserved market for hire purchase. For the furniture business, the strategy is to strengthen its logistical network and product variety, with a particular focus on reinforcing its wholesale presence in Sabah and Sarawak.
What About Shareholder Returns?
During the quarter, on June 24, 2025, the company paid a second interim dividend of 2.50 sen per share for the previous financial year ended March 31, 2025. No new dividend was proposed for the current quarter, which is typical for a first-quarter report. The company also repurchased 3.08 million of its own shares from the open market.
Summary and Outlook
ELK-Desa’s first-quarter results reflect a company successfully executing its growth strategy on the top line but facing the harsh realities of a challenging economic climate on the bottom line. The growth in the hire purchase portfolio is a positive sign of market demand, but the sharp increase in credit provisions is a clear warning of mounting risks. The furniture segment’s margin compression further highlights the cost pressures in the current environment.
Looking ahead, the company’s ability to manage credit quality and navigate external pressures will be paramount. Investors should keep a close eye on impairment trends and the potential impact of the changing automotive landscape on its core business.
Key points to monitor going forward:
- Credit Quality: The trend in impairment allowances and the net impaired loans ratio will be the most critical indicator of the health of the hire purchase portfolio.
- Margin Management: Whether the furniture segment can stabilise its margins amidst rising operational costs.
- Impact of EV Market: How the company adapts to the falling residual values of used ICE vehicles, which form the backbone of its financing assets.
- Capital Management: The effectiveness of using increased borrowings to generate profitable growth while keeping the gearing ratio at a manageable level.
A Blogger’s Perspective
From my professional viewpoint, this report highlights a classic dilemma for lenders in a challenging economy: how to grow the loan book while managing rising credit risk. The 35% jump in impairment allowances is a significant flag that investors should monitor closely. It suggests that while demand for financing is there, the quality of borrowers may be deteriorating due to cost-of-living pressures. The emerging risk from the EV market’s impact on used car values is another crucial factor that could affect long-term profitability and asset recovery.
What are your thoughts on ELK-Desa’s performance? Do you think the company can effectively manage the rising credit risks in the current economic climate?
Share your views in the comments section below!
