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The 1994 Investor

Author: The1994Investor   |   Latest post: Sun, 7 Mar 2021, 2:01 PM

 

Revenue Group Berhad – Riding on the e-commerce boom

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Established in 2003, Revenue has been operating in the electronic payments industry in Malaysia for the past 17 years. Revenue is a cashless payment solutions provider in Malaysia offering a multichannel payment solution through its flagship platform, revPAY, that facilitates the acceptance of payment transactions across various payment channels from physical EDC terminals to virtual payments to QR Payment.

In this article, we introduce and discuss Revenue’s business fundamentals, promising prospects riding on the e-commerce boom, and our opinion on its fair value.

Revenue is principally engaged in three core business segments, as follows:

Electronic Data Capture Terminal (“EDC”)

Distribution, deployment and maintenance of EDC Terminals.

From this segment, Revenue earns either a one-off income when the EDC terminals are sold outright or recurring income from rentals and ancillary services provided, such as repair and maintenance services.

Electronic Transaction Processing (“ETP”)

Provision of electronic transaction processing services for credit cards, debit cards, and electronic money payment scheme, where the Group acts as Acquirer, Master Merchant, or third-party payment processor.
Income derived is either in the form of a share of net merchant discount rate earned or a pre-determined commission earned on transactional value.

Solutions and Other Services (“Solutions”)

  1. Solutions and services in relation to the payment gateway, payment network security and payment infrastructure.
  2. Digital payment solutions and services such as mobile top-up, phone bill payment, utility bills payment, game credits, entertainment and ticketing services.
  3. E-commerce websites, as well as the provision of cross border logistics and last-mile delivery in Malaysia.

As at FYE2020, Revenue’s business is mainly supported by its EDC segment, 60.9%, followed by ETP, 20.9% and lastly the Solutions segment, 18.2%.


UPDATE ON REVENUE’S DEVELOPMENT SINCE ITS IPO

During Revenue’s IPO in June 2018, the Group raised a total of RM20.6m, of which RM13.6m / 66% was allocated for business expansion purpose.

As for the remaining RM6.9m, RM2.5m was allocated for the repayment of bank borrowings, RM1.7m for working capital requirements, and RM2.7m to defray listing expenses. Table below illustrates Revenue’s utilization of the funds to-date.

Notes:
1. RM8.1m was allocated to purchase approximately 9,000 units (RM900/unit) of EDC terminals to meet the increase in demand for EDC terminals.
2. RM1.5m was allocated for expansion into the Cambodia and Myanmar market. Funds were to set up overseas offices and recruitment of employees to drive marketing and handling of administrative operations. On 15 July 2020, the Board resolved to extend the time frame by an additional 12 months for utilization of remaining funds. The extended time frame expires in July 2021. The Group is still engaging with local partners and financial institutions in those countries to set up its presence. The Covid-19 pandemic has caused international travel restrictions and the Group will require more time to implement its business expansion strategies.

Since its IPO, Revenue also made several acquisitions and ventures with reputable parties, as summarized below.

  1. Acquisition of 51% equity interest in Buymall Services Sdn Bhd (“Buymall”) for RM3.3m.
    • Incorporated in 2017, Buymall is operating an online marketplace via www.buymall.com.my. They provide procurement services of consumer goods from overseas e-commerce websites, as well as the provision of cross border logistics and last-mile delivery throughout Malaysia.
    • As part of the deal, Buymall vendors’ guaranteed a minimum profit after tax (“PAT”) of RM0.30 million for FYE 30 September 2019 and a minimum PAT of RM0.50 million for FYE 30 September 2020, with a combined PAT of not less than RM0.80 million for FYE 2019 & 2020.
    • The RM3.3m offer values Buymall at 13x PE, based on its expected results of RM0.5m in FY2020.
    • The Board first announced the acquisition in March 2019. On 10 May 2019, the Board announced that the acquisition has been completed.
       
  2. Acquisition of 70% equity interest in Anypay Sdn Bhd (“Anypay”) for RM4.9m.
    • Incorporated in March 2016, Anypay is principally involved in e-commerce, software, and mobile application development on digital payments such as mobile top-up, phone bill payment, utilities, game credits, entertainment and ticketing services. Refer to www.anypay.my.
    • As part of the deal, Anypay vendors’ guaranteed a minimum PAT of RM0.50 million for FYE 31 August 2019 and a minimum PAT of RM0.75 million for FYE 31 August 2020, with a combined PAT of not less than RM1.25 million for FYE 2019 & 2020.
    • The RM4.9m offer values Anypay at 9.3x PE, based on its expected results of RM0.75m in FY2020.
    • The Board first announced the acquisition in March 2019. On 10 May 2019, the Board announced that the acquisition has been completed.
       
  3. Acquisition of 80% equity interest in Scanpay Sdn Bhd (“Scanpay”) for RM1.0m.
    • Scanpay is principally engaged in e-commerce services including online and e-payment services (electronic money issuance). Scanpay is a licensed E-money issuer under BNM. No disclosure was made on Scanpay’s business model and financial track record. Refer to myscanpay.my.
       
  4. Acquisition of 40% equity interest in Wannatalk Malaysia Sdn Bhd (“Wannatalk”) for RM5.0m.
    • Incorporated in March 2016, Wannatalk is principally engaged in the provision and development of Artificial Intelligence (“AI”)-powered chatbot and messaging platform (“Wannatalk chatbot”), AI-powered smart content repository (“Firebox”), facial recognition-centered products and services (“Facecard”) and AI-powered big data mining and fraud detection software (“Grayfox”). Refer to www.wannatalk.ai.
    • As part of the deal, Wannatalk vendors’ guaranteed of minimum PAT of RM0.30 million for FYE 31 December 2020 and a minimum PAT of RM0.50 million for FYE 31 December 2021, with a combined PAT of not less than RM0.80 million for FYE 2020 & 2021.
    • The RM5.0m offer values Wannatalk at 25x PE, based on its expected results of RM0.5m in FY2021.
    • The Board first announced the acquisition in August 2020. On 1 October 2020, the Board announced that the acquisition has been completed.
       
  5. In March 2019, Revenue was granted the money lending license from the Ministry of Urban Wellbeing, Housing and Local Government. Revenue intends to leverage on its historical transactional data to evaluate merchants’ creditworthiness and risk profiles, subsequently extending micro-financing to those merchants based on their scoring outcome.
     
  6. On 9 November 2020, Revenue signed a memorandum of agreement with Huawei Malaysia to develop an e-services hub, focusing on small and medium enterprises (“SMEs”).
    • The main aim of the collaboration is to build an ecosystem to develop digital innovations through which both parties can help over 900,000 SMEs in Malaysia move towards digital transformation and effectively boost their presence in the market. The platforms will be jointly developed using Huawei’s cloud and artificial intelligence (AI) technologies.
       
  7. On 17 November 2020, the Group secured a contract to provide the MyDebit tokenisation platform for PayNet – which is the national payments network and central infrastructure for Malaysia’s financial markets.
    • The platform will be integrated with and used by more than 30 banks throughout Malaysia upon completion. To date, there are approximately 45 million MyDebit cards in market circulation in Malaysia.
    • Management has not indicated its estimates in terms of contribution to the Group.
       
  8. Throughout FY2020, Revenue established several key strategic collaborations, which includes working with Sogo Department Store Sdn Bhd to facilitate the payment acceptance at its stores, partnership with Shopee Malaysia to facilitate the payment acceptance of its’ in-app ShopeePay’s mobile QR payment at its touchpoints throughout Malaysia, and teaming up with Chevron Malaysia to provide e-wallet acceptance at all the Caltex petrol stations.
     

Since its IPO, the Management has been innovative and aggressive in charting its future growth plans. In the longer term, the Group targets to diversify its business source and venture into higher-margin segments, with a recurring source of income i.e. B2B solutions and B2B2C platforms, etc.

Overall, we are positive of the Group’s development and prospects, despite the disruption and slowdown in business activity caused by the Covid-19 outbreak.


STRONG REVENUE GROWTH; DECLINING PROFIT MARGINS

Over the past 4 years, the Group’s revenue grew at a compound annual growth rate (“CAGR”) of 43.0% p.a. FY2020 growth was 33.7% / RM19.6m.

Over the years, Revenue’s growth was primarily driven by the increase in sales and rental of EDC terminals, followed by its Solutions segment. Growth in the ETP segment was dampened following the outbreak of Covid-19.

In terms of profitability, the Group’s margin has been declining since its peak in FY2018. GP and net margins both fell from 64.8% and 19.1% in FY2018 to 48.4% and 10.2% in FY2020 respectively. The reasons for the decline can be summarized as follows:

  1. Change in product mix i.e. Growth of the EDC segment (lower margin) outpaced the growth of the ETP segment in FY2019 and FY2020;
  2. Declining average selling price for EDC terminals; and
  3. Increased operation cost (higher EDC terminal depreciation and workforce expenses) after several business acquisitions that took place over the years

Given the recent spike in Covid-19 cases in Malaysia and the reimposition of MCO in several states, the Management is cautious on the outlook and expects business performance to remain challenging in the near term.

Whilst the Group has laid down and embarked on a series of plans, they expect business performance to be affected due to the poor economy and low consumer spending environment.

For 1Q2021, the Group recorded revenue growth despite the poor market environment; however, margins continue to decline with its latest quarter GP and net margins at 49.9% and 9.1% respectively. The table below shows a snapshot of the Group’s 1Q2021 results:


STRONG FINANCIAL POSITION

Note: FCF = CFO less ‘Net cash flow from investing activities’

Over the years, Revenue generates strong cash flow from operations (“CFO”), with an average CFO to Net Income of 1.78x. The dip in cash flow generated in FY2019 was mainly due to increase in inventory holdings, as the Group stocked up on EDC terminals in anticipation of the strong orders from its clients.

With exception for FY2019, the Group generates superb CFO, with average CFO to Net Income of about 2x.

Furthermore, the Group is in a net-cash position of RM28.9m (total debt is minimal at RM6.5m only) and has a current ratio of >1.5x as at FY2020.


REVENUE’S KEY STRENGTHS AND PROSPECTS FOR GROWTH

  • Bank Negara Malaysia’s (“BNM”) regulatory push to encourage migration to e-payments have been spurring demands of EDC terminals. For the past two years, The Group has received and fulfilled commendable amount of orders for its new digital payment terminals. The Group is currently working with its partner banks on the development, testing and certification on a new digital payment terminal.
  • Regional expansion as part of the Group’s medium-term growth plans. The Group intends to expand to Myanmar and Cambodia by partnering with local financial institutions or local industry player in those countries and/or Malaysian financial institutions that already have presence in these countries to provide electronic payment processing services for various Card Schemes.
  • Provision of value-added solutions and services. The acquisition of Buymall, Anypay, Wannatalk and Scanpay enables the Group to provide a more robust Business-to-Business-to-Consumer solution, and forms part of its long-term strategy to diversify its business income.
  • Capable and visionary management team with >15 years of industry experience.

KEY RISKS FOR CONSIDERATION

  • Security breaches could materially adversely affect its operations.
  • The Group’s products and services are subject to rapid technological developments, evolving industry standards, changing ICT operating environments, and strong competition from existing and future competitors.
  • Dependent on a major customer. During Revenue’s IPO, it was disclosed in its prospectus that Customer A contributes more than 50% of its revenue for FY2015 – 2017. Based on FY2020 revenue contribution by segment, we believe concentration risk from Customer A would have been diluted for the strong growth in EDC segment. Customer A is believed to be Taobao.
  • Foreign exchange risk. The Group purchases EDC terminals in USD and settlement to one of their merchants is transacted in RMB. Depreciation of the Ringgit against these currencies may result in higher operation cost / forex losses.
  • Failure to achieve synergistic from the several business acquisitions / mergers made over the years.
  • Prolonged impact from Covid-19 outbreak would drag the Group’s business performance and its plan for expansion into Cambodia and Myanmar. Profitability margins will continue to face pressure as the increase in cost of operations outweighs the growth in revenue.
  • Intense market competition has been a concern of the Management since its IPO. The Management estimates further compression in margins as merchant discount rate (“MDR”) and transaction fees are expected to decline over time.
    As seen from the table below, revenue from ETP segment declined in FY 2020 despite the increase in total transaction value processed. While the reason behind the observed margin compression could be caused by other factors i.e. change in income source mix, we are not discounting the fact that MDR and transaction fees will be declining over time as the industry matures.
  • High expectation has been priced-in, with its current valuation at about 42x PE on its 1-year forward results (FY2021).

MAJOR SHAREHOLDERS AS AT 9 DECEMBER 2020

The 3 founders, Mr Ng Chee Siong, Ng Shih Chiow and Ng Shih Fang own a total of 41.8% of the Group via a personal stake of about 14% each.

Local funds i.e. Kenanga, Public, PMB and CIMB etc controls 15.6% and public free float holds the remaining 42.5%. Note that local fund holdings in Revenue have increased from 4.2% as at 26 September 2018 to 21.4% as at 30 March 2020.


PEERS COMPARISON

GHL Systems Berhad is the only listed peer of Revenue on Bursa Malaysia. There are other non-listed peers including Interbase Resources Sdn Bhd, MOLPay Sdn Bhd and Ipay88 Holding Sdn Bhd.

For the past 5 years, GHL Systems traded at a PE range of 42.9x – 85.2x, a mean of 54.9x. The recent surge in valuation may be attributable to the abnormal low profit / losses made in Q1 and Q2 of FY2020.

Since its listing, Revenue trades at a PE range of 27.3x – 45.9x, mean of 37.9x.

Taking into consideration of Revenue’s healthy profitability, strong balance sheet and solid growth prospects, we would value Revenue at a forward PE range of 35x – 45x. Nevertheless, near term headwinds due to prolonged impact from lockdowns may put pressure on the Group’s growth plans and profitability margins.

On 5 November 2020, the Board proposed to transfer listing of the Group to the Main Board. If approved, the transfer to Main Board would improve the stock’s publicity and accessibility to institutional investors.


HOW MUCH IS REVENUE WORTH?

Assumptions:
1. FY2021 Revenue assumed to grow between 20% – 30%. For the past 4 years, Revenue’s grew at a 4-year CAGR of 43%. FY2020 growth was 33.7%. We expect revenue growth rate to decline, for the larger revenue base and prolonged impact from the outbreak of Covid-19.
2. GP margin assumed to range between 47% – 49%. Revenue’s 4-year average GP margin has been 56.9%. 1Q2021 and FY2020 GP margin were at 49.9% and 48.5% respectively.
3. Operating cost assumed to increase by 15% – 20%. Annualising 1QFY2021 operating cost would amount to RM27.1k in operating cost.
4. Share of profits from associates was derived from the 40% guaranteed profits committed by Wannatalk.
5. Net margin assumed to range between 12.0% – 14.4%. Despite only achieving a net margin of 10.3% in FY2020, we expect subject’s margin to improve gradually as growth in revenue would outpace the future increase in operation cost. The steep increase in operating cost for the past few years were due to subject’s aggressive business acquisitions.
6. Diluted share base considered for the special issue of 5.4m shares allocated at RM1.30 each, to comply with its Bumiputera Equity Condition imposed by the Ministry of International Trade and Industry (MITI). On 18 December 2020, SC has announced that Revenue is deemed to have complied with the Bumiputra Equity Condition.

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REVENUE 1.71 -0.02 (1.16%) 5,753,200 

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