The outcome from recent discussion was positive. Gross profit margin softened to 51% this quarter mainly due the aggressive rollout of Android-based EDC terminals which led to increase in depreciation and installation costs. 9MFY19 EDC terminal sales stood at 16k units while incremental rental was estimated at 3-4k units. YTD total transactional value processed by RGB stood at c.RM973m with half of the value from its online marketplace transactions and the balance from offline card schemes. Forecast maintained. Reiterate BUY rating with unchanged SOP-driven TP of RM1.67.

We spoke to management recently post-3QFY19 results and gathered some positive outcomes. Below are the key takeaways.

3QFY19 results review. Gross profit margin declined to 51% in this quarter (from 71% in 3Q18) mainly due to aggressive rollout of more Android-based EDC terminals which led to increase in depreciation and installation costs. We understand that RGB is managing c.37k terminals as end of 3QFY19 which represents a significant growth from 15-17k terminals managed prior to IPO. 9MFY19 EDC terminals sales stood at 16k units while incremental rental was estimated at 3-4k units.

Transactional value. 9MFY19 total transactional value processed by RGB stood at c.RM973m (FY18: RM1.1bn) and revenue from transaction segment was RM15.6m (FY18: RM16.7m). About half of the transactional value is attributed to transactions processed from Company A’s affiliate online marketplace in China and the balance was from offline card-scheme transactions. We expect the transactional value to grow going forward due to continued rolling out of more EDC terminals. As end of March 2019, number of domestic EDC terminals was estimated at 522k units, which is still far from Bank Negara Malaysia’s 2020 target of c.800k terminals.

Moneylending prospect. RGB has received license to operate as money lender recently. Leveraging on this license, RGB is planning to apply analytics to evaluate merchants’ credit worthiness and risk profiles. Based on the scoring outcome, RGB can extend micro-financing to merchants for a modest return while improve their stickiness. RGB may pilot this new service in 1HFY20.

Outlook. RGB believes that its prospects and outlook remain favourable in 2019. This is premised on its future plans and the implementation of the Payment and Card Reform Framework (PCRF) by BNM to promote wider acceptance and the usage of electronics payments. The acquisitions (Buymall and Anypay) undertaken will allow RGB to provide additional value-added services on top of its all-in-one-digital payment terminals which were successfully developed and deployed.

Forecast. Unchanged as our positive view on RGB remains intact.

Reiterate BUY on the back of unchanged fair value of RM1.67 based on SOP valuation (see Figure #1), implying an upside potential of 28%. Our TP implies P/E of 43.3x for FY19, 33.1x for FY20 and 26.1x for FY21. We like the company as it is a rare proxy to the robust domestic e-payment industry which undergoing multi-year of secular growth on the back of (i) robust growth in EDC terminals; (ii) regulatory push to drive e-payment adoption; (iii) riding on e-wallet trend; and (iv) beneficiary of China cross-border e-commerce trend. Near-term catalyst for the company is its potential transfer to main market listing next year.

Source: Hong Leong Investment Bank Research - 18 Jun 2019