Summary

• To recap, Rexit Bhd (REXIT) 1H23 core net profit was largely in line with our expectation, accounting to 48.2% of our estimates of RM10.4m. Entering 2H23, we reckon the group should remain stable in its performance as its high quality revenue base comprised of significant level of recurring income, coupled with sustained demand for its products and services will serve as durable tailwinds for the group, despite uncertainties over the global growth.

• Continued expansion effort to fuel growth. Still, the group is committed to expand the e-Cover services to the financial services sector and other segments of ecommerce, targeting to bring new clients on board in FY24. The combination of its large 24x7 secured e-Cover infrastructures and experienced management team will position the group well for its expansion plan.

• Foresee normalising administrative expenses in 2H23 as compared to 2H22. Do note that administrative expenses in 2H22 was driven by (i) unrealised loss on the net fair value loss on investment in money market funds and (ii) higher depreciation charges arising from the new data centre’s computer equipment which were acquired in 4Q21.

• However, we noticed that the investment in cash funds decreased in 2Q23, indicating that any unrealised net fair value gains or losses in the future would have a lesser impact on the bottom line. Meanwhile, depreciation expenses should normalise without major capital expenditure.

• Margin stabilising. In view of the normalising administrative expenses and effective tax rate (without capital allowance claimed on acquisition of data centre assets), we expect lesser fluctuation in margins for 2H23.

• Net cash position bodes well for future expansion. As at 2Q23, REXIT’s net cash position stood at RM21.8m (16.6% of the market cap), while net cash per share recorded at 12.5 sen. Its net cash position will support capex required for any future expansion.

Valuation & Recommendation

• In anticipation of the stabilising margin, we made no change to our forecasted earnings at RM10.4m, RM11.3m and RM11.9m for FY23f, FY24f, and FY25f respectively. The forecasted earnings take into account the recurring contributions from existing customers, as well as the new source of revenue from the customers who are expected to be on board in FY24.

• We retained our BUY recommendation on REXIT, with an unchanged target price at RM0.83. The target price is derived by ascribing a P/E of 14.0x to FY23f EPS of 6.0 sen. Whilst the group does not have a fixed dividend policy, we assumed a payout of 3.9-4.4 sen per share over FY23f-FY25f based on historical trend, representing a payout ratio of 65.0% of its distributable income.

• Risks to our recommendation include possible non-renewal of mySalam Outsourcing Services Agreement which commenced on 1st January 2019 until 31st December 2023. Failure to renew the agreement will result in a negative impact on the group’s revenue. Besides, REXIT is exposed to security risks and potential system disruptions, including computer viruses, fraud, and blackouts, which may affect the group’s ability to deliver its products and services.

Source: Mplus Research - 10 Apr 2023