Revenue Group Berhad (RGB) – Riding on the Cashless Payment Trend
Are we ready to go cashless? With a rise in various cashless payment players in Malaysia such as Ali Pay, Grab Pay, Boost, Fave Pay, Razer Pay and so on, it is not hard to see that cashless payment is the future. For investors out there, key question is – what are the opportunities to tap on this trend? In this article, we share our view why an upcoming IPO by Revenue Group Berhad is a 68% upside opportunity (TP: RM 0.62) to ride on this trend that you may never want to miss!
1) Who is Revenue Group Berhad (RGB)?
RGB is principally engaged in providing various services and integrated payment platforms for many businesses. Products and services offered by the company include physical terminal payment [collecting payments via cards using electronic data capture (EDC) terminal], virtual payment (internet banking or online payment), hybrid payment (QR payment), software development and revPAY (in house payment gateway).
2) How RGB makes monies?
Figure 1: Revenue Group Berhad Business Activities
Recall the moment when you had your dinner and you chose to pay with your credit card in the restaurant. The waiter came to you with a small device that he then slot in your credit card into the device and requested you to key in your password. And just in a blink of an eye, the billed was paid. Do you ever question where this device comes from? This device is known as EDC terminals and RGB is one of the key suppliers for EDC terminals in the market.
Generally, the EDC terminals are supplied on either outright sales or rental basis. As such, RGB can either earn one-off revenue when the EDC terminals are sold outright or monthly recurring revenue from the rentals and ancillary services provided, such as periodic maintenance and repair services.
As of 11 May 2018, RGB maintains as much as 20,100 EDC terminals nationwide of which approximately 15,700 EDC terminals are owned by the group and the remaining 4,400 EDC terminals owned by financial institutions.
Other than that, RGB also makes monies by providing payment gateway to merchants, which allows merchants to open up cashless payment option, including credit and debit card payment in the store for their clients. In return, RGB earns a portion of transactional value whenever customers paid with a credit or debit card. This is known as net merchant discount rate. RGB has acquired merchants via direct acquisition and collaboration with financial institutions. These financial institutions include AmBank, OCBC Bank (Malaysia) Bhd, United Overseas Bank (Malaysia) Bhd, Affin Bank and First Data Merchant Solutions S/B.
On top of that, it is also highlighted in the prospectus that RGB is appointed by Company A (perhaps Alibaba?) to process outbound payments made via internet banking by Malaysian consumers who transact on their affiliate's China online marketplace. The group generates revenue from a pre-determined commission rate calculated on the transactional value from this role. We believe this segment can be a major growth engine in the future for RGB as online shopping becomes more popular in Malaysia.
3) How is RGB doing so far?
RGB's electronic transaction processing segment has registered an impressive growth within the FY2015 to FY2017 period as a result of the increasing adoption of electronic payments by the consumers. RGB’s plan to roll out new digital EDC terminals with capability to accept QR payment from FY2019 onwards is anticipated to lift revenue of rental or sale of EDC terminals as well as electronic transaction processing services, which will help RGB to maintain its strong growth momentum moving forward.
RGB has also registered commendable gross profit margin of 66.4%, 54.9% and 59.4% in FY2015, FY2016 and FY2017 respectively. RGB’s net profit margin remained within 14% to 20% for the FY2015 to FY2017 period, excluding one-off gains following the disposal of investment properties in FY2017. The strong margins could imply RGB is currently having strong competitive advantages within its industry.
Figure 2: Transactional value processed
Figure 3: Revenue segmentation by business division
Figure 4: Revenue, Pretax Profit and Pre Tax Margin
4) What are the major strengths of RGB?
One of the key competitive strength of RGB is having a in house developed multi-channel payment system, revPAY. This system allows RGB to connect financial institutions, card payment schemes and merchants under one platform, it facilitates payment acceptance and transaction processing over physical EDC terminals, e-commerce transactions over the Internet, mobile commerce transactions through mobile devices or QR payment. All these in just one platform.
We believe this could be the major reason why RGB is able to partner with an extensive range of local and international branded payment schemes as well as financial institutions. This gives a very strong advantage for RGB. Imagine a merchant can just open up multiple payment options to their clients just by signing up with RGB. How convenient is that. The more merchants sign up with RGB, more payment schemes and financial institutions would join the party. And this continues. This is a classical competitive advantage known as network effect. Numerous successful companies such as Microsoft, Facebook and Tencent have leveraged on this advantage to drive out competition.
5) What’s next for RGB?
RGB has highlighted several growth drivers for the company in the coming years, including embarking a regional expansion into new markets with growing mobile phone penetration and new products development (QR payment system and ewallet solutions). We see the latter being very exciting as mobile payment is a segment we see that will grow significantly in the coming years.
6) A 68% upside for RGB?
Looking at initial subscription price of RM0.37 per share and RGB’s FY2017A EPS of 3.1 sen, RGB is being priced at a PE multiple of about 12x. This valuation compares very favourably with the existing listed player, GHL Systems Berhad (GHL), which is traded at a staggering high PE multiple of 57.4x! Even we ascribed a more conservative PE multiple of 20x, RGB can be worth as much as RM0.62 per share, implying a 68% upside from its initial subscription price. While RGB has a smaller business scale compared to GHL, we see significant brighter prospect for RGB in comparison given RGB’s possible involvement in the growing QR payment system and ewallet solutions while GHL does not. Hence, we believe RGB could be a bargain for those investors who are keen to tap on the growing cashless payment trend.
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