Summary 

• Rexit Bhd (REXIT) 3Q23 core net profit climbed 5.9% YoY to RM2.2m, bringing the  9MFY23 core net profit to RM7.3m. The core net profit was below our estimates  (70.2%) due to later-than-expected client’s onboarding, but largely in line with  consensus estimates (76.8%).

• 3Q23 core net profit expanded 5.9% YoY despite a decline in revenue, due primarily  to the higher margin resulted from increase in other income, coupled with the lower  administrative expenses. QoQ, core net profit declined 20.0% in line with the lower  revenue, mainly attributed to the lower contribution from software customisation  services.

• We remain optimistic about REXIT’s current negotiations with prospective new  clients. Once a successful agreement is reached, the client is anticipated to come  on board during 4Q23, initially contributing through motor e-Cover service, and  subsequently expanding into non-motor transactions in 1Q24. We like the  introduction of the new revenue stream from the client through subscription-based  services, which will generate a steady and recurring income.

• Asset wise, we expect the acquisition of servers and other computer equipment in  FY22 will adequately support the needs of the new client. Hence, we do not expect a  significant capital expenditure following the client’s onboarding. However, we do  foresee a rise in labour cost as additional manpower will be required to tailor the  system according to the new client’s requirement. Nevertheless, the expected  increase in labour costs is projected to be relatively minor in comparison to the  overall costs involved.

• Meanwhile, the group is engaged in discussions with another potential client, aiming  to onboard them by FY24. As for the mySalam Outsourcing Services Agreement,  which began on 1st January 2019 and is set to expire on 31st December 2023, there  have been no updates regarding its renewal at this time.

• Moving forward, REXIT will remain committed to expand the e-Cover services to the  financial services sector and other segments of e-commerce. Additionally, the group  will persist in marketing its services to the regional market. However, outlook of the  group may remain challenging due to the global economic uncertainties.

Valuation & Recommendation

• As the core net profit is below our expectations, we slashed our earnings forecast to  RM9.9m, RM10.3m, and RM10.6m 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 FY23 and FY24.

• We retained our BUY recommendation on REXIT, with an unchanged target price at  RM0.83 after we rolled over to FY24f earnings. The target price is derived by  ascribing a P/E of 14.0x to FY24f EPS of 5.9 sen. Based on historical trend, we  assumed a payout of 3.7-4.0 sen per share over the next three years, representing a payout ratio of 65.0% of its distributable income from FY23f to FY25f.

• Risks to our recommendation include the potential non-renewal of the mySalam Outsourcing Services Agreement. In the event of a non-renewal of the agreement, it  could have a detrimental effect on the group’s revenue. Besides, REXIT is vulnerable to the risks of security risks and system disruptions such as computer viruses,  fraud, and power outages, which may potentially hinder the group’s ability to deliver its products and services.

Source: Mplus Research - 26 May 2023