• Panda will be utilising its IPO proceeds to expand (i) cloud-based modules and expand its offerings, (ii) its workforce within Malaysia to respond to issues in Central and Northern regions, and (iii) regionally to Indonesia and Philippines.

• Thus, we expect the core PATAMI to grow at 3.0-9.4% to RM7.3-7.9m in FY23-24f.

• Panda is priced at RM0.16 for its IPO, which is trading at 15.2x based on FY22 EPS, while FY23-24f are estimated at 14.8x and 13.5x.

• We arrived at our fair value of RM0.215 (34.4% upside from its IPO price) by ascribing a target P/E of 18.0x to FY24f EPS of 1.2 sen, which represents a discount of 39.6% from the peers’ average P/E of 29.8x.

Company Background

• Panda Ecosystem Bhd (Panda) started its business in 2003 and are principally involved in the development, customisation, implementation and integration of its Retail Management Eco-system. In addition, they are involved in the trading of thirdparty software, trading of IT hardware as well as software customisation, implementation and integration of process control and automation solutions.

Business Overview

• Panda’s business is categorised into 2 different segments namely (i) Retail Management Eco-system and (ii) Other Businesses – which involves the trading of third-party software and IT hardware. They charge clients with a one-off fee for software licenses and implementation, as well as recurring income for continued subscription services and maintenance. Clients include retailers such as groceries, convenience stores, F&B etc. See Fig#3

Retail Management Eco-system

• The retail management eco-system comprises of solutions which support various retail operational processes. It enables seamless and integrated flow of information between various departments within a retail chain as well as their network of retail stores and suppliers. Furthermore, the solutions help clients to have remote access using cloud based services, integration between different PANDA software as well as 3rd party software, which include the following:-
  i. HQ Centralised Management, Store Operations and Financial Management which is designed for management and monitoring of business operations and daily activities of a network of retail stores, management of POS, and management of financial information.
  ii. xBridge B2B which is a supply chain portal that enables electronic document exchange between retailers and their suppliers. This solution simplifies communication and minimises administrative costs which also promotes convenience and allows suppliers to instantly access and retrieve these electronic documents.
  iii. Omni-channel Engagement solution which facilitates the management of retailers' marketing and sales channels. The solution enables CRM, management of e-commerce platforms, mobile applications and digital content as well as management of delivery assignments for orders made through e-commerce platforms.

Other Business Segments

• Other business segments include trading of 3rd party software, IT hardware and Software customisation, implementation and integration of process control and automation solutions.

Industry Overview (from Smith Zander)

• The retail management solutions industry in Malaysia grew from RM176.1m in 2018 to RM351.1m in 2022 at a 4-year CAGR of 18.8%. Moving forward, the retail management solutions industry in Malaysia is forecast to grow further by a CAGR of 18.4%, from an estimated RM415.7m in 2023 to RM582.8m in 2025. (See Fig #4)

• The growth is supported by demand factors such as:
  i. The growing retail industry in Malaysia
  ii. The growing demand for cloud-based retail management solutions
  iii. The government’s initiatives to boost digitalisation

Competition analysis

• The competitive landscape of the retail management solutions industry in Malaysia is saturated with many players offering similar products. PROVIDENCE estimates that there are over 70 companies offering retail management solutions in Malaysia. The barriers to entry of the retail management solutions industry are moderately low. Despite it being crucial for industry players to have personnel with high technical expertise, there is low capital expenditure requirements and no industry-specific licences or permits required to offer retail management solutions.

Investment merits

• Growing retail industry in Malaysia coupled with Government Initiatives. Panda has about 20 years of experience in the industry. We believe that the growing retail industry and growing demand for cloud-based retail management, coupled with the government initiatives for digitalization, will improve the future prospects of Panda.

• Regional footprint, solutions and workforce expansion. The company plans to expand its offices in Melaka and KL, as well as open up a new office in Penang. Furthermore, they will be establishing 2 new service hubs in Indonesia and the Philippines, where it will provide greater customer reach and the new solutions and workforce will help with to provide better customer experience.

• Experienced management team and key personnels. Panda has management with up to 30 years of relevant experience, as well as skilled key personnel such as software engineers, after-sales and business development personnel. With Panda’s competent operational team members, they will have an edge when it comes to overcoming challenges and ensuring that operations runs smoothly as they expand.

Financials

• Stable earnings. PANDA recorded consistent revenue growth FY20-FY22 from 16.4m to 21.0m, but the core PATMI stood at RM6.9m, RM6.1m and RM7.0m across FY20- 22. With the exclusion of the one-off disposal gain in FY21, the core PATMI was lower at RM6.1m was mainly due to the increase in tax expense from Panda Software in accordance with statutory tax rate.

• Should expand gradually with its expansion plans. Going forward, we forecast Panda’s revenue to grow 2-year CAGR of 5.0% from RM21.0m to RM23.1m, while the core PATMI will increase at a 2-year CAGR of 6.1% from RM7.0m in FY22 to RM7.9m in FY24f, supported by (i) its regional expansion in Malaysia and ASEAN countries by 2025, (ii) providing new solutions and cross selling of current services to existing and new clients

Valuation & Peers Comparison

• At the IPO offer price of RM0.16, PANDA is trading at P/E of 15.2x based on FY22 EPS of 1.1 sen. Meanwhile, PANDA’s forward P/E for FY23-24f are estimated at 14.8x and 13.5x, respectively.

• We arrived at our fair value of RM0.215 (34.4% potential upside from its IPO price) by ascribing a target P/E of 18.0x to our forecasted FY24f EPS of 1.2 sen. The P/E of 18.0x represents a discount of 39.6% from the peers’ average P/E of 29.8x on the back of its smaller market cap positioning.

Investment risks

• High competition within the industry. The retail management solutions industry in Malaysia is fragmented, with numerous players that are capable of providing similar solutions. Therefore, there may be risks relating to key personnel loss as crucial personnel with highly sought after expertise may be recruited by competitors and it may be difficult to cultivate new personnel.

• Subject to performance of the retail industry. The retail industry is affected by factors such as business cycles, consumer spending power, etc. Furthermore, the increasing trend of online stores may hamper the future prospects of physical stores, thus reducing the potential need for retail management services.

Source: Mplus Research - 27 Nov 2023