From our recent meeting, we gathered that RGB’s outlook remains encouraging with more positive developments ahead. EDC demand is expected to remain robust on the back of aggressive deployments and replacement cycle to meet expiry in 2020. ETP, for both offline and online, is projected to expand sturdily stimulated by rapid EDC rollout, VMY2020, Budget 2020, Lazada and more partnerships. S&S with the full year consolidation of Buymall and Anypay will sustain growth momentum as RGB put more emphasis in creating supporting services or ecosystem surrounding EDC and ETP segments. While transfer of main market listing may not be immediate, we still like RGB and reiterate our BUY call with TP of RM1.95.

We met management for in-depth understanding of FY19 performance and what lies beyond. Overall, we are excited on its outlook with more positive developments ahead mitigating any minor setbacks. Below are the key takeaways.

Electronic data capture (EDC) terminals. In FY19, it sold 22k (FY18: 4.9k) EDC to 2 anchor banks while EDC under management surged to 33.5k (FY18: 19.2k). These have propelled EDC’s revenue by 123% YoY to RM35m. However, EDC’s blended GP margin shrank by 11-ppt YoY to 41% mainly due to higher contribution of lower margin EDC sales (32% vs rental’s 56%). For FY20, we foresee sustained strong growth as banks will deploy EDC aggressively to facilitate e-payments towards BNM’s target of 25 EDC per 1k persons in 2020. Furthermore, majority of the 609k EDC (as of Aug 19) in the market are based on Payment Card Industry (PCI) standard 3.x which will expire in 2020 and are mandatory to be replaced with PCI 5.0 security.

Electronic transaction processing (ETP). For FY19, total transactional value (TV) saw a slower expansion of 15% YoY (FY18: 68%) to RM1.3bn yet RGB managed to inch up merchant discount rate (MDR) by 10bps YoY to 1.6% on the back of better economies of scale. As a result, ETP revenue grew 20% YoY to RM20m. It explained the lower total TV growth rate was due to (1) mild gain of tourist arrivals, especially from China; and (2) flattish online transaction value. Going forward, offline TV is projected to surge on the back of (1) rapid EDC rollout elevating touchpoints in marketplace; (2) higher tourist arrivals in conjunction of Visit Malaysia 2020; (3) Budget 2020 stimulus; and (4) more partnerships such as the collaboration to enable Singapore’s NETS cardholders to shop in Giant and Guardian outlets in Malaysia. Similarly, online TV is expected to grow leveraging on (1) proliferation of e-commerce; (2) its penetration into Lazada with gradual volume increase; and (3) more tie-ups such the integration of Touch ‘n Go eWallet on Alibaba-owned Taobao and Tmall.

Solutions and services (S&S). Although contribution was small at 8%, S&S grew strongly by 52% YoY to reach RM4.7m and GP margin sustained above 60% in FY19. Both Buymall and Anypay contributed circa RM1m to the top line. We expect S&S to sustain growth momentum as RGB put more emphasis in creating supporting services or ecosystem surrounding EDC and ETP segments.

Forecast. Adjusted our assumptions based on latest info and particularly total TV. In turn, FY20-21 core net profits were lowered by 11% and 1%, respectively.

Reiterate BUY on the back of lower fair value of RM1.95 based on SOP valuation (see Figure #1), implying an upside potential of 20%. Transfer to main market listing may not be RGB’s main focus now although it is technically qualified. Nonetheless, 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.

Source: Hong Leong Investment Bank Research - 16 Oct 2019