Management Discussion and Analysis

OUR BUSINESS

RCE Capital Berhad (“RCE”) is an established investment holding company listed on Main Market of Bursa Malaysia Securities Berhad (“Bursa”) since 23 August 2006 and it is one of Amcorp Group Berhad’s subsidiaries. RCE Group’s core business is in the provision of financial services. The Group aims to provide responsible financing and ensure delivery of sustainable return to all stakeholders.

The Group’s key contributors are RCE Marketing Sdn Bhd (“RCEM”) and its subsidiaries (“RCEM Group”), the main financier and total solutions provider to our business partners. They in turn provide shariah-compliant financing to their customers, who are primarily civil servants. The monthly repayments are received from customers through direct salary deduction.

To complement RCEM Group’s businesses, EXP Payment Sdn Bhd (“EXP”) was acquired in 2014 as it provides collection services for payroll deduction of government departments under the purview of Accountant General’s Department of Malaysia as an alternative to deductions done via Biro Perkhidmatan Angkasa.

Meanwhile, RCE Factoring Sdn Bhd (“RCEF”) which was acquired back in 2007, provides an avenue for RCE Group to offer commercial financing to small and medium-sized enterprises via factoring and confirming arrangements.

OUR STRATEGY

We remain committed as a responsible financier by embracing company-wide professional practices, upholding an ethical sales channel and developing fair risk-based pricing products with the aim to achieve quality financing growth. In addition, we provide good customer service and speedy turnaround time to meet the customers’ needs for sustainable expansion of our consumer financing business, including tapping into latest technologies and process innovations to remain competitive.

SUMMARY OF GROUP FINANCIAL PERFORMANCE

For the financial year ended (“FYE”) 2020, the Group made steady progress across the board, recording a higher revenue of RM282.6 million, with a 7.6% yearon-year (“YoY”) growth from RM262.6 million in FYE 2019. This was primarily led by higher interest/profit income backed by the expanded financing base of RM1.8 billion as at 31 March 2020. While disbursements in the consumer financing market during the second half year were promising, higher early settlements moderated the overall growth. Notwithstanding that, the Group’s portfolio continued to register a 5.3% YoY growth from RM1.7 billion a year ago.

Meanwhile, the Group’s interest/profit expense increased by RM3.7 million from RM78.0 million to RM81.7 million in FYE 2020. This is due to additional borrowings being utilised, from RM1.6 billion in FYE 2019 to RM1.7 billion in FYE 2020 to fund the higher financing base. As at 31 March 2020, 61.8% (RM1.1 billion) of the total borrowings of RM1.7 billion, was in relation to the sukuk financing. The new sukuk issues has allowed the Group to enjoy cost savings averaging 10 basis points (“bps”), from 5.3% per annum (“p.a.”) to 5.2% p.a. a year ago. As a whole, the Group managed to bring down its total weighted average funding costs by 40 bps as compared to last financial year. This was made possible by the Group’s diligence in sourcing for cheaper funding and two rounds of reduction in overnight policy rates as announced by Bank Negara Malaysia (“BNM”) in January and March 2020 to 2.75% and 2.50% respectively. The Group will continue to maintain adequate liquidity for its business needs at all times.

The Group registered a higher non-core income of RM20.4 million with 31.7% YoY growth from RM15.5 million in FYE 2019, contributed largely by higher interest/profit income earned from deposits with licensed financial institutions. These deposits are mainly from repayments received for the payments of sukuk which are not due. These are mainly deposited into term deposit accounts thereby allowing us to optimise the Group’s profit.

Correspondingly, the Group’s operating expenses increased by 9.0% to RM49.3 million in FYE 2020 from RM45.2 million in FYE 2019 mainly due to the various measures taken to make the business more resilient to disruptions. These include system enhancements to cater to this ever changing economic and credit environment, upskilling and reskilling initiatives as well as the increase in compliance requirements. The Group remains attentive to the nuances of the market and managed to improve its cost to income ratio (“CTI”) at 22.0% in FYE 2020 as compared to 22.2% in FYE 2019.

With measures taken to strengthen asset quality, including credit risk management and underwriting criteria, the Group’s gross impaired financing ratio improved from 7.4% to 7.1% in the current financial year.

The Group also reported a prudent loan loss coverage of 173.0% in FYE 2020 as compared to the previous financial year of 172.1%. This is after taking into account the downward revision in real gross domestic growth forecasted by BNM following the expected contraction in the Malaysian economy arising from the COVID-19 pandemic. The COVID-19 pandemic necessitated the government to impose a nationwide Movement Control Order (“MCO”) stopping all non-essential businesses from operating for the duration of the order effective from 18 March 2020 onwards.

As the MCO only came into effect in the last 2 weeks of the FYE 2020, the Group was able to record a solid growth of 13.6% for its profit before tax from RM131.1 million in FYE 2019 to RM148.9 million in FYE 2020. As a whole, the Group delivered a commendable result for FYE 2020, with a 15.8% increase in its profit after tax to RM110.6 million as compared to RM95.5 million a year ago.

As profitability is sustained, the Group registered a return on average equity of 17.6% for FYE 2020. Similarly, the strong profit trend led to a higher earnings per share of 31.8 sen.

BUSINESS OPERATIONS REVIEW

Consumer Financing

During the financial year, focus was placed on increasing our investments in both online and offline marketing initiatives to build brand awareness and customer loyalty. These initiatives complement our sales channel, besides trainings covering regulatory requirements, code of conduct, health and sales.

Our credit risk strategy is aimed at achieving a fine balance between credit quality, profitability and growth. Credit policies and framework are reviewed periodically to ensure they remain relevant and effective, and aligned to overall credit risk appetite and exposure of the Group.

We continue to reinvest in our business to update ourselves and match the pace of an evolving market. Our office has been renovated to accommodate the growth in manpower as well as renewing service counters to better serve customers in line with our “Customer For Life” motto. Processes and technologies are also not overlooked as we continue to search for more effective and efficient practices and models that are currently available in the market.

As we move forward as a Group, consumer financing will remain our core business and primary contributor to our bottom line. We continue to monitor and maintain vigilance in identifying areas of emerging risk that could adversely impact our credit portfolio. Having said that, the disruption arising from the MCO will certainly have an impact on the business for FYE 2021.

LIQUIDITY RISK MANAGEMENT

The Group maintains adequate liquidity using diversified banking facilities from various financial institutions. The debt capital market is also tapped to raise funding through the issuance of sukuk. Funding requirements are actively monitored to ensure optimal rates are obtained.

Group borrowings which comprised short-term revolving credit lines, long-term term loan/financing and sukuk, amounted to RM1.7 billion as at 31 March 2020. At this level of borrowings, the Group’s gearing ratio is less than two times (2x).

In March 2019, a RM2.0 billion Sukuk Murabahah Asset-Backed Securitisation Programme via Zamarad Assets Berhad (“ZAB RM2.0 billion Sukuk Programme”) was established. ZAB has to-date successfully issued sukuk totalling RM501.0 million in three (3) tranches, out of which RM41.0 million were subscribed internally by our subsidiary, RCE Trading Sdn Bhd. ZAB RM2.0 billion Sukuk Programme also won the “Best Islamic ABS-Backed Sukuk 2019” award presented by Alpha Southeast Asia 13th Deal & Solution Awards 2019 on 24 February 2020.

CAPITAL MANAGEMENT/INVESTMENTS

Effective capital management is fundamental in supporting business sustainability. We further strengthen our monitoring and optimisation of our capital management by focusing on decisive measures to ensure we have strong capital base to meet regulatory requirements and expectations from various stakeholders.

In FYE 2020, the Group bought back 3,958,000 RCE shares from the market for a total consideration of RM6.0 million at an average price of RM1.50 per share. The share buybacks were carried out in accordance to set internal guidelines which, amongst other conditions, will only be activated when the share price falls below the net asset value per share of the Company. However, the share buyback activities have to be balanced with the funding needs of the business which remains the core focus of the Group. As it stands, we have accumulated RM673.4 million of shareholders’ equity as at 31 March 2020 to support the Group’s financial performance going forward.

The Group is aware of the accelerating pace of technological change. Bearing that in mind, proper due diligence is carried out where investments are concerned to ensure the right tools are being selected for systems enablement. In FYE 2020, of the RM858,000 allocated, approximately RM142,000 was incurred to enhance process simplification tools that the Group have been using since 2017, further to RM1.4 million spent last financial year.

Moving forward, in light of the COVID-19 pandemic, investments in automation and technology have become a priority and have to be more encompassing as personnel are not only required to work from home but also to continue as much as possible with business as usual. As such, more investments will be allocated to automation and technology to build systems resiliency and capability as part of our business sustainability management.

OUR PEOPLE

Our people are the most valuable asset and hence we aim to attract, develop and retain the right talent for the future growth of the Group. In FYE 2020, we continue to build employees’ competencies through our robust talent management and leadership development programmes to equip them with the right skills and an agile mindset to operate in this dynamic environment.

Our standard operating policies and procedures on human resource matters are regularly updated and reviewed to develop valuable partnerships with our employees as well as to ensure we remain an employer of choice. Please refer to pages 36 to 40 of our Sustainability Statement on employment management and development. Following the MCO, it has become clear that our people must be versatile and adaptable.

DIVIDEND

On the back of strong earnings and commitment for sustainable shareholder returns, the Board is pleased to have declared a second interim single-tier dividend of 6.0 sen per share, paid on 27 July 2020.

Together with the first interim single-tier dividend of 5.0 sen per share paid on 5 December 2019, total dividend payment for FYE 2020 was 11.0 sen per share, 2.0 sen higher compared to 9.0 sen for FYE 2019. This translates into a total dividend payout ratio of 35.1% compared to 32.5% a year ago, which is within our dividend guidance of between 20.0% to 40.0% of profit after tax implemented from FYE 2019 onwards.

Amidst the downward projection of Malaysia’s economic growth, we continue to aim to have an effective capital structure by striving to strike a balance between retaining funds for our business requirements, financial obligations as well as sustainable returns for investors.

OUTLOOK FOR 2020/FYE 2021

The global economy is expected to contract in 2020, following the COVID-19 pandemic. BNM expects Malaysia’s economic growth to be between -3.5% to -5.5% (2019: 4.3%), as the COVID-19 impact continues to affect all industries across the board. Headline inflation is forecasted to remain modest in 2020 averaging between -1.5% and 0.5% (2019: 0.7%). Nevertheless, recovery is expected in 2021.

As Malaysia focuses on containing the fallout from its economy, the government has embarked on various stimulus measures and policy rate cuts with continued public sector expenditure. Meanwhile, the financial system continues to serve the needs of the economy, remaining robust and resilient, as well as further supporting the government in weathering challenges under these unprecedented economic conditions.

Last but not least, we are committed to improve our policies and business operations to remain competitive and relevant in delivering long-term sustainable growth. We do this by aligning our strategies with the environment, social and governance principles across the Group as we move into unfamiliar social and economic landscapes post the COVID-19 pandemic.