RCE-Shaping up to be a Star?

I attached this write-up from Absolute Return Investment's blog.

Read wehat he wrote and then consider whether it is alright to jump on the bandwagon of this legal Ah Long business.

Background

RCE Capital is the only listed non-financial institution that provides personal loans to government servants. Its business falls under the Moneylenders Act, 1951, which requires a money lending license and this is renewable yearly. The loans are made in tie-ups with cooperatives, with direct salary deduction via Angkasa (National Cooperatives Organisation of Malaysia) which minimizes the incidence of non-performing loans. RCE’s competitive edge lies with its strong delivery network (distribution and collection) and short approval time.

RCE imposes an effective rate of 16% for personal loan which is the highest in the market. The maximum loan offered by RCE is RM100,000 and the maximum repayment period is 10 years. Additionally, monthly deductions must not exceed 60% of take home pay. Effective interest rate charged at 15-16% is one of the highest in the market vs. cost of fund at approximately only 6%.

Earnings outlook:

Expect RCE to maintain >20% loan growth

Receivables growth is strong, registering 30-40% growth per annum due to increase in salary for government employees. The company is planning a second private placement of up to 10% of its total shares to fund working capital requirement. There is plenty of room for growth as personal loan and micro credit market remain largely untapped in Malaysia and RCE is well positioned to benefit from the growth due to its strong network. Current market share of total monthly collection by Angkasa is <10%.

Business appears sustainable, 6x PE, >20% growth, >25% ROE

4Q09 net profit rose to RM18.5m (+47% yoy, +2% qoq) mainly due to strong receivables growth. This translates into 2.6sen EPS.

Let’s do a simple estimate:

Assuming flat growth (very conservative) in the next 4 quarters, total EPS of 10.4sen values the stock at 6x PE. At current price (RM0.615), the stock is really attractive: (1) investors are buying into a 6x PE stock with >20% growth rate and ROE >25%. Stocks like this typically trade above >10x PE, even during bad times. With improvement in market sentiment, it is not surprising to see the stock’s PE move above 10x. (2) Business model and earnings is sustainable. Direct salary deduction reduces risk of non performing loan. (3) Brokers’ reports have target price ranging between 80sen and RM1.00. Plenty of upside even at current share price. This is a real chance to possess our very own money lending business at an attractive price.

So, are you game to Ah Long as well?