We initiate coverage on GHL with a BUY and MYR1.40 TP (22% upside,27x CY16F P/E). We expect GHL to register FY15-17 earnings of MYR18m-44m, implying sturdy 3-year-earnings CAGR of 86% for FY14-17. We favour this stock as: it has exciting growth prospects from its TPA business, it is a proxy to e-payment growth in ASEAN markets and it is a beneficiary of BNM’s effort to accelerate e-payment growth.
Capturing ASEAN’s massive market potential. An end-to-end provider of a full suite of e-payment solutions and a market leader in Malaysia and the Philippines, GHL Systems (GHL) is making its mark as a regional player with over 110,000 point-of-sale (POS) terminals across Malaysia, the Philippines and Thailand. We believe GHL is a proxy to epayment growth in ASEAN and is well-positioned to tap into the rising demand for non-cash payments in these markets, as rising household income feeds a burgeoning appetite for consumer goods and underliesthe need for these economies to go cashless. We see more scope for GHL to grow its market share as many economies in the region are still cash-intensive.
Riding the tailwinds of ETP initiatives. GHL is a beneficiary of the Government’s Economic Transformation Programme (ETP) under the Financial Services National Key Economic Area (NKEA). In order to reduce cash transactions to 63% by 2020 from over 90% currently, Bank Negara Malaysia (BNM) has instituted measures to stoke demand for cashless payments through an increase in POS terminal deployment,while providing incentives for the provision of e-payment services by merchants via lowering interchange fees (IF) for payment cards.
Transaction payment acquisition (TPA) momentum to drive earnings. While sales and rental of electronic data capture (EDC)terminals and their related software have been the bread-and-butter of GHL’s business, the company is shifting its focus to a transaction-based revenue model via its TPA segment to better capture the market potential of the rising e-payments growth across ASEAN markets. To date, GHL has expanded its TPA footprint in Malaysia, the Philippines and Thailand through TPA partnerships with banking and non-banking institutions. We estimate that this segment could potentially contribute about 78-85% of the company’s FY15-17 revenue (from about 72% now).
Risks include: Lower-than-expected merchant acquisition, sluggish adoption of e-payments and potential liability from merchants.
Investment Thesis/ Valuation ASEAN e-payment proxy. We believe GHL is a proxy to the e-payment growth in ASEAN and is well-positioned to tap into the rising demand for non-cash payments in these markets, as rising household income feeds a burgeoning appetite for consumer goods and underlies the need for these economies to go cashless. In Malaysia, we see GHL as one of the major beneficiaries of the Government’s push to reduce cash transactions by increasing electronic payments. In essence, Bank Negara Malaysia (BNM) has instituted measures to stoke demand for cashless payments through an increase in POS terminal deployment. The central bank targets to reduce cash transactions to 63% by 2020 from over 90% currently. To achieve this, BNM looks set to triple the amount of POS terminals in the country to 800,000 by 2020 from over 230,000 currently. In our view, this could translate into greater business volume for GHL which is involved in sales and rental of electronic data capture (EDC) terminals. More importantly, we believe the company would look to further expand its existing network reach of 50,000-60,000 POS terminals in Malaysia to further strengthen its market share of 20-25% currently. Outside Malaysia, GHL’s presence is predominantly in the Philippines and Thailand with over 50,000 POS terminals in Philippines and 9,000 POS terminals in Thailand, both of which are markets with sizeable ppulations and still relatively cash intensive. The acquisition of E-pay Asia Ltd (EPY) is a significant boon to GHL as it is one of Asia’s largest regional electronic payment networks that span over 18,000 locations in Malaysia to enable mobile and non-mobile reloads, as well as payment of household bills at e-pay terminals.
Transaction payment acquisition (TPA) to propel growth. On top of that, we see enormous potential in GHL’s diversification into a transaction-based revenue model via its TPA segment across ASEAN markets. GHL aspires to be a third-party merchant acquirer by placing its own POS terminals into these merchant outlets. In return, we estimate that the company gets 0.4% to 0.8% of revenue share out of the total transaction amount transacted via their machines. To date, GHL has established its TPA footprint in Malaysia, the Philippines and Thailand through partnerships with banking and non-banking institutions. We see this TPA-centric approach as an important milestone for the company, as the volume-driven, recurring nature of the TPA business model is more lucrative and will allow GHL to better capture the potential of increasing e-payment transactions across ASEAN. We expect TPA to be a major contributor of revenue growth, potentially contributing about 78-85% of FY15-17 revenue from around 72% in FY14 and 23% in FY13. Notably, the company is targeting to sign up between 3,000 and 4,000 merchants in Malaysia for 2015 by targeting the Tier-3 and Tier-4 merchant space – which falls outside banks’ primary target markets, yet makes up 90% of the merchant market. GHL has also expanded its reach to the public sector with its agreement with Amanah Ikhtiar Malaysia repayment for AIM’s borrowers.
E-commerce a potential wildcard. GHL launched its eGHL internet payment business last April in Malaysia, which provides a platform for online merchants from small, medium or large enterprises to start accepting payments for online transactions. Through its G-Direct internet payment solutions, small and medium online merchants can now offer online shoppers a comprehensive range of payment options to pay for their purchases securely, including FPX, MasterCard, Visa, MCash, UnionPay, and Alipay, among others. We understand that eGHL has already partnered with some shopping cart providers such as EasyStore.my, MyBizCart, Sitegiant, Square.my and webShaper to assist small and medium enterprises to set up their online stores. eGHL also creates value for the banking sector as acquiring banks that require customised online services for their large customers can now partner with eGHL to deliver solutions that fit their needs. Going forward, GHL plans to expand eGHL’s reach to Thailand and the Philippines. Although contribution to earnings are likely to remain insignificant over the next 12-18 months, we see positives in this horizontal integration of GHL’s e-payment model amidst growing interest in internet shopping in Malaysia – the online shopping market in Malaysiaalone is expected to grow at an accelerated pace from MYR842m in 2011 to exceed MYR1.9bn in 2016, according to a Euromonitor survey conducted in 2011 ( source: The Star Online, 26 Jul 2012).
Valuation. We initiate coverage on GHL with a BUY recommendation based on a fully-diluted TP of MYR1.40, pegged to a 27x CY16F P/E. We believe that GHL is comparable to international payment sector players such as Global Payments Inc (GPN US, NR), Ingenico (ING FP, NR) and Wirecard AG (WDI GR, NR) based on the similarity of their business functions as merchant acquirers and to local payment sector players MyEG Services (MYEG MK, NR) and ManagePay Systems (MPSB MK, NR). We believe a 30% premium to its payment sector peers’ CY16F P/E of 20.6x is justified in view of its strong projected 3-year net profit CAGR of 86.0% for FY14-17, vs its peers’ average of 37.4% (based on consensus estimates). Our ascribed 27x CY16F P/E implies an undemanding PEG of 0.31x, compared with its peer average PEG of 0.55x.
Business Background Background. Incorporated in Malaysia in Mar 1994, GHL started out as a company focusing mainly on research & development (R&D) for online transactions and software solutions. The company was listed on the MESDAQ Market (now the ACE Market) in Apr 2003 and was later transferred to the Main Board (now the Main Market) of Bursa Securities in Feb 2007.
GHL received the Payment Card Industry-Data Security Standard (PCI DSS) compliant status in 2012. The PCI DSS certification attests that GHL’s N3Net infrastructure complies with the highest security standards in handling cardholder data. This is defined by the PCI Standards Security Council, which comprises Visa, MasterCard, Discover, American Express and JCB. This is a security certification that is increasingly required by banks of their payment service providers.
Under a contractual agreement with the Malaysian Electronic Clearing Corporation SB (MyClear), a wholly-owned subsidiary of BNM, GHL is an approved payment provider that provides e-debit services (an ATM PIN-based payment) to merchants.
Shareholding structure. Simon Loh Wee Hian, executive vice chairman of GHL is a major shareholder of the company. Since his entry and appointment to the board of directors in Dec 2010, Loh has raised his stake in the company to 35.8% from 12.1% in 2010. In 2014, GHL undertook a private placement exercise involving the allotment of 20% of the company’s enlarged share capital to CYCAS, a private equity fund managed by Creador SB. To date, CYCAS is the second-largest shareholder and owns a 28.9% stake in GHL. With the completion of the placement, Creador’s directors – Mr Brahmal A/L Vasudevan (founder and CEO) and Ms Lim Sze Mei (director) – were appointed to the board. GHL has a workforce of 720 employees in its main office in Malaysia, the Philippines and Thailand. Management is currently led by a team of experienced industry experts in the banking, payment and telecommunication space.
GHL has three core operating business segments, namely: i. Shared services segment. Comprises revenue from the sale, rental and maintenance of EDC terminals compliant with the Europay-MasterCard-Visa (EMV) platform and other card acceptance devices, and involves the sale of cards to banks and other payment operators. The shared services contributed about 21% of the company’s FY14 revenue.
ii. Solution services segment. Comprises revenue from the sales and services of payment solutions, which include network devices and the related software, outsourced payment networks, management/processing of payment and loyalty cards, internet payment processing and the development of card management systems. Solution services contributed about 6% of the company’s FY14 revenue. iii. TPA segment. Comprises transactional-based revenue derived from directly contracting with merchants to accept payment and loyalty cards, prepaid top-up, bill collection services and conduct other payment services at POS. The TPA segment contributed about 72% of the company’s FY14 revenue.
A regional payment player. With major operations in Malaysia, the Philippines, Thailand and Australia, GHL has established itself as a provider of end-to-end payment solutions encompassing physical and virtual payments in South-East Asia and Australia. GHL’s full suite of payment solutions has allowed it to grow its strong customer base to Thailand, the Philippines, Singapore, China, Taiwan, Australia, Romania, the Netherlands and the Middle East. The company has an extensive network of POS terminals across South-East Asia and is a market leader in Malaysia and the Philippines with an estimated market share of 20-25% and 40% respectively.
Good cheer on EPY acquisition. In 1Q14, GHL acquired EPY for MYR68.9m via a share swap with the issuance of 2.75 new GHL shares (at MYR0.44/share) for each EPY share. The EPY acquisition has helped pave the way for GHL’s entry into the cash payment market. EPY is one of Asia’s largest regional electronic payment networks that span over 18,000 locations. E-pay terminals accept cash, process debit and credit card payments for mobile and non-mobile reloads, and facilitates bill payments and other payment collection. EPY has a market share of around 60% in the online top-up market. With EPY onboard, we estimate that GHL now boasts an enlarged network reach of 50,000-60,000 POS terminals in Malaysia alone. We believe this acquisition would help reduce GHL’s revenue concentration risk on banks, diversify its earnings base to telecommunication providers and other retailers, as well as open up cross-selling opportunities between EPY and TPA. We think that potential cross-selling opportunities may include selling EPY products and services to GHL’s merchant base. As EPY’s revenue is almost entirely derived from its operations in Malaysia, its integration into GHL will allow it to leverage on the latter’s TPA presence in Thailand and the Philippines.
TPA the roaring growth engine. TPA is a transactional-based revenue model which involves directly contracting with merchants to accept payment and prepaid cards and perform other e-payment services at POS. As a third-party acquirer, GHL gets a share of the merchant discount rate (MDR) as its source of revenue (see Figures 8and 9). We think that GHL’s strategy to grow the TPA segment will bode well for the company, as the volume-driven, recurring nature of the business model is more lucrative and will allow GHL to better capture the potential of increasing e-payment transactions across ASEAN. We expect TPA to be a major contributor of revenue growth, potentially contributing about 78-85% of FY15-17 revenue from just 23% in FY13 (see Figures 10 and 11).
Source: RHB Research - 8 Apr 2015
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