• U/G to BUY from Neutral, new MYR0.88 TP from MYR1.23, 29% upside. Following the slump in share price after a weaker set of results in 2Q22 and P/E de-rating, we believe GHL Systems’ current share price presents a significant upside and an opportunity to BUY into the secular trends of payment digitalisation. This is despite our negative earnings forecast revision, which is in line with the potential slowdown in retail spending and prolonged margin compression trend, amid higher inflationary pressure.

• 1H22 earnings recap. 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 segment, and lower- than-expected contribution from solution services. The higher revenue of MYR193.8m (+8.1%) was driven by the Transaction Payment Acquisition (TPA) division (+18.7%) in all its geographical segments, due to the continued relaxation of movement restrictions and cross border travel.

• Outlook. We believe the shared services segment will continue to be undermined by margin pressure given the downward trend of ASP, rental rates, and higher depreciation charges for the newer terminals. However, the Transaction Payment Value (TPV) is expected to trend higher amid the full reopening of the economy and borders, alongside the secular trends of switching to e-payment and cashless channels. The solution services segment will likely be better in 2H22 with the certain roll out of one-off hardware and solution sales, which are lumpy in nature.

• Recalibrating the forward numbers. We take the opportunity to adjust our FY22F-24F earnings downward by 7.2-6.0%, cognisant of the potential slowdown in retail spending – should inflationary pressures persist – along with the prolonged margin compression trend for the acquirer business. Our FY23F P/E has also been revised to 31x from 40x, in line with its 5-year mean, resulting in a lower TP of MYR0.88 (from MYR1.23). Note that our TP is inclusive of a 6% ESG premium, based on our proprietary methodology.

• Upgrade to BUY. Despite the expectation of lower YoY earnings in FY22, the share price slump has priced in the weaker set of results in 1H22 and P/E de-rating that is in line with the sector revision, attributable to the continued hawkish tone of the US Federal Reserve that is a factor in the increasing bond yield, and risk of earnings derail on the uncertainties in the world economy. Current share price presents a good entry point to BUY into the proxy for ASEAN’s payment digitalisation and the secular trends of switching to e-payment and cashless channels.

• Downside risks to our call include weaker-than-expected TPV and margin, as well as electronic data capture terminal sales.

Source: RHB Research - 12 Oct 2022