• Incorporated in 2011, the Company principally involved as an electronic reload distributor as well as a bill payment services provider through its digital platform.
• Moving forward, we project a three-year earnings CAGR of 11.5%, with core PAT expected to reach RM6.2m-7.5m over the next three years. This growth is largely supported by the expansion of its SRS corporate and end-user base, the extension of its services on its digital platform, SRS and higher sales/user.
• We assign a fair value of RM0.47 per share for Richtech Digital Bhd, representing an 88.0% upside from the IPO price of RM0.25. This valuation is based on a P/E ratio of 14.0x, pegged to FY25f EPS of 3.38 sen. We believe it is fair as the peer average P/E and forward P/E ratio stood at 12.1-29.5x for the IT Services sub- industry of the Technology sector.

Investment Highlights

Cutting-edge cashless solution. Richtech is positioned as a striving cashless payment player, pioneering its business since 2011 through its digital platform, SRS. Specializes in electronic reloads, which include mobile airtime reloads, mobile data reloads, prepaid digital TV reloads, game credits, application credits, and eWallet credits. Besides, it provides billing payment services, including postpaid mobile network services, utilities, maintenance of the national sewerage system, postpaid digital TV, internet services, quit rent and assessment payments, as well as education loan and installment plan payments. As of 2023, the group commands 4% of the electronic reload and bill payment services market in Malaysia, based on its gross commission revenue.

Growing reload segment amid consumer preference for cost advantage. Richtech's reload segment has been growing at a CAGR of 40.7%, in line with the steady consumer preference for prepaid over postpaid, which accounts for over 75% of the total mobile subscribers in Malaysia (Fig #2). We believe this preference stems from the cost advantages offered by prepaid plans. According to TechRakyat, the median price of prepaid plans in Malaysia is only RM37.06, which translates to just over RM1.20 per day, while mobile postpaid plans have a median price of RM113.91, based on offerings from Celcom, Maxis, and Digi as of January-nearly three times the cost of prepaid plans.

The growing adoption of digital payments, particularly eWallets, has been driven by attractive rewards such as cashback, discounts, loyalty points, and government initiatives like Cashless Boleh 4.0; fourth annual campaign, led by Payments Network Malaysia (PayNet) and the Ministry of Finance (MoF), aims to bolster digital payment within the public sector. While larger players like Touch 'n Go would lead the pack, we believe smaller players like Richtech will play a crucial role in the ecosystem by serving niche markets. For instance, certain malls in Malaysia have introduced their own platforms catering to regular shoppers; in which, Richtech currently is collaborating with Hari-Hari, a local apparel shops, to drive higher traffic to its digital payment platform.

Driving higher traffic through expanding the customer base. As of the latest practicable date, the group serves over 4m users through a network of more than 1k SRS corporate users (including resellers, mobile phone shops, sundry shops, and apparel shops) and over 32k end-users via its SRS platform. Moving forward, the group aims to capitalize on its proceeds by (i) Investing in Search Engine Optimization (SEO), enhancing brand visibility, (ii) Leveraging social media platforms like Instagram and TikTok, and (iii) Forging partnerships with retailers with over 70 outlets, to driver higher traffic to its digital platform, SRS.

Steady demand ahead. According to IMR, the electronic reload and bill payment services industry is expected to grow at a CAGR of 11.5% between 2024 and 2026, driven by a large and expanding customer base of prepaid mobile network plan users, increasing internet usage, and growing demand for digital payments. We believe Richtech is well-positioned to capitalize on this growth by targeting specific niches while maintaining a strong PAT margin of over 67% during the Financial Periods Under Review.

Business Overview

Richtech is an electronic reload distributor as well as a bill payment services provider through its digital platform, SRS. The Company provides both front-end and back-end SRS systems that offer electronic reload and bill payment services to its corporate users, including resellers, mobile phone shops, sundry shops, and apparel shops.

It also provides third-party mobile operators with the ability to connect either directly or through an intermediary to the back-end of SRS system via API for their own customers. End-users can enjoy the SRS app, in which they can download for free from the Play Store or App Store, where they can perform prepaid reloads or pay their bills.

The Company generates commission-based revenue from electronic reload services by purchasing reloads at a discounted rate from distributors or telecommunication operators, earning profits from the difference between the face value and the discounted rate.

For its bill payment services, the Company first places a deposit or credit pool with payment solution providers, and then earns a profit either as a percentage or a fixed sum of the transaction, as agreed between Richtech and the payment solution providers, after users complete the billing process on its SRS platform.

Company Background

Richtech was incorporated in 2011, originally distributing electronic reloads for mobile airtime and data via an SMS reload system and a web portal, namely 'onlinereload.net' (now known as the SRS Portal). At the time, its base primarily consisted of SRS corporate users who were reload retailers. In line with the growing use of smartphones and mobile applications, the group developed its in-house mobile application, 'SRS Mobile,' which was launched in 2013. Since then, the company has expanded its offerings to include services such as payment for postpaid mobile, utilities, and internet services.

Future Plans and Business Strategies

To expand SRS end-user base. While corporate users continued to contribute a significant chunk to Richtech's top line, the Company plans to intensify its marketing and promotional activities to capture a larger end-user base for its SRS platform by investing in Search Engine Optimization (SEO), increasing brand visibility, utilizing social media platforms such as Instagram and TikTok, and leveraging its partnership with retail chains with over 70-200 outlets like Hari-Hari, a local apparel retailer with over 100 outlets.

Extend service offering on its platform. The Company has expanded its SRS platform services from mobile airtime reloads to bill payments for utilities, international mobile networks, gaming credits, prepaid digital TV, and eWallet credits. Moving forward, it aims to launch a marketplace on its SRS App, allowing SRS corporate users like Hari- Hari to sell products through the Company's platform. This collaboration enables Hari- Hari to capitalize on the Company's extensive user base of 4m, while simultaneously increasing platform usage and generating revenue through sales commissions.

Financials

Revenue highlights. The group reported a revenue of RM7.8m in FY23, representing a 2-year CAGR of 27.7% from RM4.8m in FY21. While the number of SRS users decreased by 17.5%, from 4.95m in FY21 to 4.1m in FY23-resulting in a simultaneous decline in Gross Sales-the growth was attributed to an improvement in the average Gross Sales per user, which increased by 6.18% to RM163.1m; underscoring that transaction value per receipt grew over time, despite the reduction in the number of users. Core earnings stood at RM5.4m.

Earnings forecasts. Moving forward, we project 3-year earnings CAGR of 11.5%, with core PAT expected to reach RM6.2m, RM6.8m, and RM7.5m over the next three years. This growth is largely supported by: (i) the expansion of its SRS corporate and end- user base, following the collaboration with Hari-Hari and other brands with 70 outlets, (ii) the extension of its services on its digital platform, SRS, as well as (iii) higher gross sales per user.

Valuations

We assign a fair value of RM0.47 per share for Richtech Digital Bhd, representing a 88.0% upside from the IPO price of RM0.25. This valuation is based on a P/E ratio of 14.0x, pegged to FY25f EPS of 3.38 sen. We believe it is fair as the peer average P/E and forward P/E ratio stood at 12.1-29.5x for the IT Services sub-industry of the Technology sector.

Investment Risk

Dependent on its major customers. Iqka Collection Services and Real One Group contributed over 15% of Gross Sales during the Financial Years Under Review, but despite strong 7-9-year relationships, there is no guarantee they will remain on the Company's platform, as switching to alternatives is possible.

Dependent on its major suppliers. Enzon Group accounted for over 35% of electronic reload purchases during the Financial Years Under Review. However, despite a 7-year relationship, the absence of a long-term contract poses a risk of supply disruptions if Enzon ceases to supply the Company.

May be affected by security breaches. As the Company retains user information on cloud services like Dropbox, it is exposed to IT risks such as hacking, espionage, cyber intrusions, and internal breaches, including unauthorized employee access, which could harm the Group's reputation and disrupt its operations.

Dependent on key senior management. Discontinuation of service of the key senior management may disrupt key decision making within Richtech's business operations.

Source: PublicInvest Research - 24 Jan 2025