GHLSYS’s 1HFY22 results disappointed largely due to lower gross profit margins. Higher contribution from transaction payment acquisition (TPA) was partially offset by weaker showing from shared services and solution services. CNP was hit by unfavourable revenue mix that may likely continue as the recovery of consumer spending could stall under an inflationary environment. Hence, we cut our FY22F/FY23F net profit by 32%/22% and lower our TP by 21% to RM1.10 (from RM1.40). Maintain MARKET PERFORM.

Below expectations. 1HFY22 CNP of RM10.5m (-25.8% YoY) missed expectations, representing only 30% and 31% of our and consensus fullyear estimates, respectively. The variance against our forecast came largely from lower-than-expected margins due to unfavourable revenue composition.

Results’ highlight. YoY, 1HFY22 revenue climbed 8.1% on higher contribution from the TPA segment (+18.7%) which cushioned the decline in the shared services (-4.9%) and solution services (-34.8%) segments.

The growth in the TPA segment can be attributable to the growing adoption of digital payment among merchants and consumers as a measure to maintain the practice of contactless transactions. Meanwhile, the drop in revenue from shared services was due to lower rental income received as a result of EDC terminal retrievals that took place in previous quarters, while the fall in solution services (which makes up c.3% of group revenue) can be explained by the lack of customised one-off projects compared to the year before. As a result, 1HFY22 CNP fell 25.8% despite an 8.1% revenue growth as the transactions processed remains e-wallet centric which yields lower margin compared to credit cards transaction.

Uncertainty remains. Despite the relaxation of lockdown measures in neighbouring counties, cross border travel remains nascent. Hence, the group maintains its cautious guidance going forward on fears of a high inflationary and interest rate environment that may dampen the recovery momentum of consumer spending.

Forecasts. Reduced FY22F CNP and FY23F CNP by 32% and 22% to RM23.5m and RM30.6m, respectively.

We maintain our MARKET PERFORM call with a lower Target Price of RM1.10 (previously RM1.40) on rolled forward FY23F PER of 40x (in line with peers’ forward mean such as Revenue Group, PayPal and Square). There is no adjustment to our TP based on its 3-star ESG rating as appraised by us (see Page 4).

Risks to our call include: (i) slower total processed value (TPV) growth, (ii) reluctance of merchants in adopting cashless transactions, (iii) competition from non-listed peers and overseas peers.

Source: Kenanga Research - 26 Aug 2022