Covid-19 may weigh down on the seasonally weaker 3QFY20. ETP may see declines in both online and offline volumes owing to the contractions in cross border e-commerce orders as well as inbound tourists, especially from China. However, this may be partly cushioned by EDC that continues to see strong demands from partner banks. Bursa has approved its placement proposal en route for Main Market. Lower our FY20-22 earnings forecasts leading to lower TP of RM1.31. Reiterate HOLD given dilution impact from the new shares.

Covid-19 impact. In a recent meeting, RGB shared that it is not immune to the pandemic and it may weigh down on the seasonally weaker 3QFY20. Electronic transaction processing (ETP) may see declines in both online and offline volumes owing to the contractions in cross-border e-commerce orders as well as inbound tourists, especially from China. However, this may be partly cushioned by electronic data capture (EDC) which continues to experience strong demands from partner banks.

EDC. Thanks to its effective inventory planning, RGB managed to stock up sufficient hardware prior to the Covid-19 outbreak. Currently, there is an industrywide hardware shortage as production shutdowns disrupted supply chain. In 2QFY20, partner banks purchased 12.8k units (+327% QoQ) to increase cashless touchpoints in the market and replace existing ones to comply with the latest security standard. Combining with EDC rentals, RGB was managing 60k EDC as end of 2QFY20, a significant jump from circa 33k as recorded in FY19. This bodes well for RGB allowing it to boost recurring income from monthly maintenance fee. EDC contribution is expected to grow from strength to strength going forward supported by both robust sale and rental demands.

ETP. In 2QFY20, total transaction value (TTV) gained 5% QoQ spurred by online mega sales such as 11.11 and 12.12 to RM388m but ETP revenue was lower QoQ due to lower average value per transaction processed. We understand 3QFY20 is challenging due to Covid-19 and may exert pressure on its contribution. Since early February, the lockdowns in China have caused logistical obstacles that led to countless delayed online order deliveries and subsequently orders being cancelled by buyers. As such, online ETP revenue is expected to be lacklustre on the back of many incomplete transactions. On top of that, the volume of inbound tourists have plunged amid global travel restrictions leading to materially lower offline TTV. Tourism is an important segment to RGB who provides ETP services to world-renowned payment schemes including Alipay, UnionPay, JCB, NETS and more. On the bright side, we understand the processing traffic coming from the newly acquired local e-commerce player is increasing every month and there is still ample room for growth.

New placement. Bursa has approved its proposal to issue up to 45m new ordinary share (11.6% of existing issued share capital) to third party Bumiputera investors to facilitate its Main Market listing transfer. To recap, the proceeds are largely earmarked for capex (EDC purchase), followed by revPAY and IT enhancement and expansion, working capital and the expenses of this proposal.

Forecast. Guided by the outlook above, we tweak our EDC and TTV assumptions, which lead to lower FY20-22 PAT by 9%, 13% and 13%, respectively. Our TP is lowered to RM1.31 based on SOP valuation (see Figure #1). Nevertheless, we reiterate HOLD despite having more than 10% upside given the future dilution impact from the new placement shares. RGB is a proxy to the robust domestic e payment industry supported by (1) robust growth in EDC terminals; (2) regulatory push to drive e-payment adoption; (3) riding on e-wallet trend; and (4) beneficiary of China cross-border e-commerce trend.

Source: Hong Leong Investment Bank Research - 13 Mar 2020