Monday, November 22, 2010

RCE Capital -- In valuation I trust ?

Outstanding shares : 710 mln.
Market Capitalization : 444 mln(710 mln x $0.625/share)

What is RCE Capital doing?
RCE is involved in the provision of personal loans and consumer-financing services to public and private sector employees, factoring and investment in a real-estate trust.

Business Model
RCE Capital has a solid business model. If you are able to deduct from a person with a steady income, it is easy to understand why their business model is solid. It is also easy to understand why they are granted by RAM a AAA asset backed security to keep their funding cost low.

The following is extracted from Maybank Securities way back in 2005 in their initial coverage report.

RCEM provides financing for KOBENA, KSB and KOWAJA to disburse to their members, who are government servants, in the form of consumer financing and personal loans. RCEM is currently increasing its focus on its portfolio of personal loans. Previously, RCEM disbursed mainly consumer financing to the cooperative members. With increase in competition from other cooperatives and companies, such as MOCCIS, Courts Mammoth and Berjaya Singer, RCEM began giving out personal loans, offered by KOBENA, KSB and KOWAJA under the Skim Pembiayaan Peribadi (SPP).

The repayment for the loans provided is done by way of direct salary deductions to be deposited directly into the Trust Account opened in the name of the various cooperatives. The deduction of the salary is undertaken by a centralized body, Angkatan Koperasi Kebangsaan Malaysia Berhad (ANGKASA).

The cooperatives offer financing and loan schemes for their members based of specified eligibility criteria. Deductions under the schemes do not exceed 60% of the individual’s basic pay.

RCEM administers and monitors collections from ANGKASA. The monthly salary deduction is remitted to the respective Trust Accounts jointly controlled by the cooperatives and RCEM. RCEM has direct assignment over Receivables and direct control over funds in the Trust Accounts. Service fees are paid to the cooperatives based on the supply arrangements with RCEM.


I am going to skip all the textbook reasons (durable competitive advantage, low PE, okay dividend yield (2.4%), reputable management team especially major shareholder is Azman Hashim of AMCORP)….. bla …. Bla…..

I am also going to skip the usual reasons of low liquidity, lack of research house coverage or slower growth to talk down the stock.

I will put my money on the line simply because I think

(i) downside is limited after the major shareholders exhausted selling.

I am sure they have depressed the share for 2.5 years with perpetual selling and finally this company is under-owned by institutional funds.

(ii) The sector as a whole is out-of-favor. If you truly believe that you like to buy things out-of-favor, this is it. Somehow, some day – the market sentiments turn hot, people will take notice or if the share price frustrates the major owners long enough, they will take it private. At the rate they are growing their book, it will soon selling less than 1X P/BV in 2 – 3 years time.

You can see in this chart that despite of all the reasons of lack of coverage, why would Goldman or Public Mutual managed to spot this gem in 2007?

(iii) Reversion to mean(let's say sentiments turn from 5X PE to 7X PE, potential price appreciation will be up to 0.98 on the conservative side). If we get superhot market, it may rocket to $X.XX(you have to use your imagination to fill it up based on PER band)

(Please click on any images to see detail)

Disclosure: The author has no position yet.

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