RCE Capital Bhd is holding its ground with a HOLD call and a target price of RM3.00 as it receives the government's announcement on a significant civil service salary increase set for 1 December 2024. Despite a somewhat lacklustre performance in the first quarter of FY25, the company believes the worst is behind it and anticipates positive impacts from the forthcoming salary adjustment.

For the first quarter of FY25, RCE posted a net profit of RM30.3 million, marking an 18% decline year-on-year but a 4% increase quarter-on-quarter. This result, which represents 20% of the full-year forecast, is in line with expectations. The slight drop in gross financing growth by 1% QoQ was consistent with the trends observed in the final quarter of FY24, reflecting a decrease in financing applications due to poorer credit quality and higher living costs.

The company's non-performing financing (NPF) ratio saw a marginal increase of 22 basis points QoQ, attributed to civil service members retiring or leaving their positions. Despite these challenges, RCE anticipates an improvement in future quarterly earnings. Stabilisation in operations following a minor civil service salary adjustment in July and the expected major salary hike are projected to bolster financing growth.

The imminent salary increase, hinted to be between 15% and 43% by the Communications Minister on 7 August 2024, is expected to positively influence RCE's financing receivables. Historically, there has been a strong correlation between government salary adjustments and RCE's financing growth. The firm's current estimates and target price are based on an average 15% growth in financing receivables over the year following the salary hike. Should the actual salary increase exceed this average, there could be an upside to both earnings estimates and the target price.

As the details of the salary hike become clearer, RCE Capital remains poised for potential adjustments in its financial outlook, while currently offering a decent dividend yield of over 5% per annum.