Post our meeting with Rexit’s management, we foresee further upside to the group’s transaction-based revenue with recent upgrades to the eCover system facilitating its key end-users (i.e., insurance agents) in processing transactions across a broader range of insurance classes. As we pencil in higher transaction-based revenue, we have raised our FY24F to FY26F earnings forecast by +12.3% to +13.0%. Corresponding to our earnings upgrade, our TP for Rexit is raised to RM0.93 (previously RM0.825) based on a target PE of 14.0x CY24F EPS, closely in line with the stock’s 5-year mean. Also, given the stock’s improved risk-reward potential, we upgraded our recommendation on Rexit from Hold to Buy.

System Upgrades Presents Upside to Transaction-Based Revenue

Post our meeting with Rexit’s management, we foresee further upside to the group’s transaction-based revenue, which it generates via its core e-Cover system (a proprietary online insurance transaction system allowing insurance companies and their intermediaries to deliver products and services electronically). Transaction-based revenue remains Rexit’s key revenue contributor, accounting for ~1/3 of group revenue.

According to management, Rexit, in recent years, has been busier than usual with customisation works for the e-Cover system, which mainly involved expanding the range of insurance classes it supports for respective key customers (i.e., insurers). This was attributed to the impetus for organisations, including insurers, to accelerate their digitalisation agenda during the COVID- 19 pandemic. Driven by the higher software customisation services rendered, Rexit’s FY23 revenue and net profit increased 7.5% YoY and 20.9% YoY to RM26.7mn and RM11.0mn.

Alongside the e-Cover system’s upgrades, we note that its capabilities have recently improved a step further as it now facilitates key end-users (i.e., insurance agents) in processing transactions across a broader range of insurance classes. Essentially, with more transactions channelled via the e-Cover system, Rexit will benefit from increased transaction fees. All in all, as we pencil in higher transaction-based revenue, we have raised our FY24F/FY25F/FY26F earnings forecast by +13.0%/+12.8%/+12.3%. Post earnings revision, we project FY24F/FY25F/FY26F earnings growth at +2.2%/+4.9%/+3.9%.

Focus Remains on Driving Growth Locally

Into FY24, management reiterated Rexit’s focus on driving growth locally from both existing and new customers within the insurance industry. Currently, the group remains occupied with fulfilling the backlog of customisation works for the e-Cover system, which is expected to extend into 2024. This includes i) ongoing expansion of the range of insurance classes supported and ii) the implementation of new modules as insurers continue to enhance their insurance plans with new features. That said, management also shared key challenges the group faced, including the shortage of software development staff and rising operating costs amid inflationary pressures.

mySalam Outsourcing Services Agreement May be Renewed

Rexit’s mySalam outsourcing services agreement with Great Eastern Takaful Bhd (GETB) is due for expiry at the end of 2023. mySalam is a free takaful income assistance scheme by the Government, which provides takaful protection for eligible individuals. To recap, under a 5-year agreement (1 January 2019 to 31 December 2023), Rexit is to develop, manage, and operate the mySalam portal for eligible members. However, the agreement may be renewed for an additional 2 years or any specified period as required by GETB, subject to regulatory approval. The contract value amounts to ~RM5.6mn/annum. In the event of non-renewal of the agreement, we estimate our FY24F to FY26F earnings forecast to be hit by -13.5% to -14.7%.

Valuation

Corresponding to our earnings upgrade, our TP for Rexit is raised to RM0.93 (previously RM0.825) based on a target PE of 14.0x CY24F EPS, closely in line with the stock’s 5-year mean. Also, given the stock’s improved risk-reward potential, we upgraded our recommendation on Rexit from Hold to Buy.

We continue to like Rexit for its resilient business model, exposure to the defensive insurance sector, as well as robust ROE and margin. Meanwhile, forward yields are also decent, with FY24F to FY26F at 5.5% to 6.0% with a DPS forecast of 4.5sen to 5.0sen based on an assumed dividend payout ratio of 70%.

Key downside risks include i) security risks and system disruptions, ii) failure to adapt to the latest technological developments, and iii) non-renewal of mySalam outsourcing services agreement.

Source: TA Research - 14 Sept 2023