• D/G to NEUTRAL from Buy, with lower MYR1.23 TP from MYR1.54, 3% upside. 1H22 core earnings of MYR10.2m missed expectations despite record high revenue, dragged by the margin compression in shared services and lower contribution from solutions services. These were partially cushioned by sustainable growth in the transaction payment acquisition (TPA) segment. Intense competition and margin compression in the acquirer business, along with potentially slower retail spending amid prolonged inflationary pressures may cap near-term growth potential.

• Below expectations. GHL Systems’ 1H22 core profit of MYR10.2m (-29.6% YoY) came in at only 28.8% and 30.7% of our and Street’s full-year forecasts, mainly due to the margin compression in the shared services and lower-than-expected contribution from solution services. The higher revenue of MYR193.8m (+8.1%) was driven by the TPA division (+18.7%) in all its geographical segments due to continued relaxation of movement restrictions and cross border travel.

• Clouded by lower margins. Despite the higher (+9.2% YoY) revenue, core profit in 2Q22 contracted by 43.4% YoY to MYR4.9m on lower margins in the shared services segment, where both the rental rates and ASP for terminal were affected, along with higher depreciation charges for the newer terminals. EBITDA margin for the group compressed to 14.3%, compared to 22.1% in 2Q21 and 16.5% in 2Q22. Similar trends were observed in the QoQ comparison. On a brighter note, GPM for TPA improved slightly to 0.190% vs 0.180% in 1Q22 and 0.185% in 2Q21, while GPM for e-pay continued to inch lower to 0.789%, compared to 0.855% in 1Q22 and 0.953% in 2Q22.

• Transaction payment value (TPV) trend. 2Q22 total TPV was at a record high of MYR6.8bn (+23% YoY; +10% QoQ), supported by stronger retail spending on the back of an improved mobility trend as most governments are relaxing SOPs and more businesses are opening up. GHL Systems’ TPA and e-pay footprints grew 1% QoQ to 127,100 and 51,400.

• D/G to NEUTRAL. Following the weaker set of results, we cut earnings for FY22F-24F by 28%, 20%, and 20% after factoring in lower margins for the shared services segments and e-pay service. This led to a lower TP of MYR1.23, based on an unchanged FY23F P/E of 40x (in line with its 5-year mean) and inclusive of a 6% ESG premium, based on our proprietary methodology. We believe the TPV uptrend YoY will sustain with the full reopening of the economy and borders for the countries that GHL Systems operates in, alongside the secular trends of switching to e-payments and cashless channels. However, we are cognisant on the potential slowdown in retail spending should the inflationary pressure remain, along with the prolonged margin compression trend for the acquirer business.

• Downside (upside) risks to our call include weaker (stronger)-than- expected TPV, margins, and electronic data capture terminal sales.

Source: RHB Research - 26 Aug 2022