A Full Analysis of Revenue Group Berhad | Towards A Cashless Society

Revenue Group Berhad (RGB) (KLSE:REVENUE) is a cashless payment solutions provider in Malaysia, offering a single platform that provides multi-channel payment solutions. Its single platform, revPAY, facilitates the acceptance of payment transactions across various payment channels from physical Electronic Data Capture (EDC) terminals to virtual payments (via e-commerce / mobile commerce channels) to QR Payments.

RGB was listed on Malaysia’s ACE Market in July 2018 at an initial public offer (IPO) price of RM0.37. Since then, the group’s share price has risen over 230% in less than 2 years. In this article, we will take a closer look at RGB’s business profile, management team and recent financials to assess whether the group is suitable for investment. 

Business Overview

RGB’s products and services are divided into three segments, namely deployment of EDC terminals, electronic transaction processing and solutions and services to payment infrastructure. Its customers include banks, non-bank institutions, physical store merchants, online store merchants and an e-money payment scheme. 

(Source: 2019 annual report)

EDC terminals

RGB is a vendor of EDC terminals. The terminals are supplied on either outright sales or rental basis. RGB can either earn one-off revenue when the EDC terminals are sold outright or recurring revenue from the rentals and ancillary services provided, such as periodic maintenance and repair services. 

RGB’s strategy for the terminals rental business is to identify merchants and refer them to be recruited under the financial institutions. As such, rental of the terminals will be paid/ sponsored by the financial institutions. Although this strategy resulted in lower rental income as compared to direct merchant acquisition, it reduces collection risks and administrative work. 

Electronic transaction processing

All electronic payments are processed via the revPAY platform, which captures payment information from merchants, encrypts such information and transmit them to the card scheme. 

Revenue is derived through the processing of payments and the rates are dependent on the role of RGB in the transaction (acquirer, payment processor, master merchant, etc.) and also arrangements with financial institutions. Revenue derived is either in the form of a share of net merchant discount rate (MDR) earned or pre-determined commission earned on transactional value.  

Solution and services

RGB has developed its own payment line encryption solution, XANZO, to ensure that data transmitted electronically along the payment network is secured and not misused and stolen during transmission along with the payment network. 

Revenue in this segment is generated from the sales, development and licensing of software, payment network security solutions, as well as its related hardware including its maintenance services.   

Revenue by segment

In 2019, EDC terminals contributed the largest share of group revenue at 59.8%, while electronic transaction processing and solution and services accounted for 34.1% and 6.1% respectively. Note that total transactional volume (TTV) processed by the group has more than quadrupled from RM300.4 million in 2015 to close to RM1.3 billion in 2019. 

(Source: 2Q 2020 presentation slides)

Synergic developments

RGB has recently obtained a money lending license from the Ministry of Urban Wellbeing, Housing and Local Government. RGB intends to leverage on its historical transaction data to evaluate merchants’ creditworthiness and risk profiles and extend micro-financing to those merchants based on the scoring outcome. 

RGB has also completed 2 acquisitions, which are 51% equity interest in Buymall for a purchase consideration of RM3.3 million, and 70% equity interest in Anypay for a purchase consideration of RM4.9 million. Both deals were satisfied by the issuance of a total of 6.6 million ordinary shares of RGB at an issue price of RM1.25 each. 

Buymall is principally an online market place and provides procurement services of consumer goods from overseas e-commerce websites, as well as the provision of cross border logistics and last-mile delivery to the Malaysian customers. At present, Buymall covers e-commerce websites such as Taobao, Tmall, JD, PChome, Momomall, etc. Separately, Anypay provides digital payment services to B2B2C users such as mobile top-up, phone bill payment, utilities, game credits, entertainment and ticketing services. Both acquisitions are viewed as complementary to RGB and expand on its suite of value-added services to customers. 

Secular tailwinds

Electronic payments provide a more expedient and efficient means of payment as costs related to cash and cheque handling can be considerably reduced. Moreover, electronic payments can enhance financial inclusion with financial services now extended to unbanked communities.  

RGB is expected to benefit from Bank Negara Malaysia (BNM)’s regulatory push to encourage migration to e-payments, which include (i) raising e-payment transactions to 200 per capita, (ii) raise point of sales (POS) terminals to 25 per 1,000 inhabitants, (iii) increase the use of debit cards to 30 transactions per capita, and (iv) reduce the use of cheques to 100 million. See BNM’s three-pronged approach below. 

Shareholding profile

(Source: 2Q 2020 presentation slides)

RGB’s largest shareholders remain the original three founders at 44.4%. They are:

Name	Designation	Role
Mr Eddie Ng Chee Siong	Co-Founder, Managing Director and Group Chief Executive Officer	Co-founder of the group and is responsible for the overall strategy and corporate director of the group, including sales, marketing initiative and business development.Has more than 15 years of working experience in the local electronic payments industry.
Mr Brian Ng Shih Chiow	Co-Founder, Executive Director and Group Chief Operations Officer	Co-founder of the group and is responsible for day to day operations, including establishing group policies, setting and monitoring key performance indicators for various departments as well as overseeing administrative and finance functions.Has more than 15 years of working experience in the local electronic payments industry.
Mr Dino Ng Shih Fang	Co-Founder, Executive Director and Group Chief Technology Officer	Co-founder of the group and is responsible for developing ICT strategies and directions. He manages the group’s R&D and IT teams monitors the development and advancement of new technologies for potential new products and services. Has more than 17 years combined working experience in the electronic payments industry in Canada and Malaysia.

As investors, we prefer owner-operator businesses as there is greater assurance that management is motivated to drive the business since they are major shareholders. Do note that there is increased interest in RGB from institutions as shares held by public funds have increased from 19.7% to 21.4% over a 6-months’ period.

Proposed special issue 

RGB has proposed to implement a special issue of 45 million shares to comply with its Bumiputera Equity Condition imposed by the Ministry of International Trade and Industry (MITI) as a condition of its listing on the ACE Market. 

RGB plan to use the proceeds raised from the special issue to expand the group’s EDC terminal and electronic transaction processing business.

Financials  

Measure 1: Growth in revenue and profits

(Source: 2Q 2020 presentation slides)

The group recorded spectacular compounded annual growth rates (CAGR) of 41.7% and 44.0% in revenue and profit after tax respectively over the past 5 years. The group has experienced multi-year growth on the back of robust growth in EDC terminals, the regulatory push toward adoption of electronic payments as well as a surge of interest in mobile payments and e-wallets. 

Measure 2: Profitability

(Source: 2Q 2020 presentation slides)

RGB’s gross profit margins of 55.0% – 66.4% and net profit margins of 14.7% – 21.3% are impressive. We believe that the group has a certain degree of operating leverage since it has high fixed costs and low variable costs. The group can enjoy an increase in margins and profits when there is rapid growth in sales. Conversely, in an economic downturn, margins and profits may deteriorate when revenue declines substantially.      

Measure 3: Liquidity

(Source: 2Q 2020 presentation slides

RGB does not have any liquidity issues as it has recorded positive current ratios of 1.02x – 2.38x for the past 5 years. Furthermore, the group is in a net cash position of RM21.3 million as at 31 December 2019. 

Round 4: Dividends payout

RGB does not have a formal dividend policy. When a company is growing quickly, it is ideal for management to retain its earnings and to reinvest it back into the business to generate higher returns for shareholders. 

Conclusion

With a closing share price of RM1.23 as at 8 May 2020, RGB is trading at a price to earnings (PE) ratio of 45.4, and market capitalisation of RM497.0 million. The group is riding high on the increased adoption of cashless payments and could represent an attractive proposition to growth investors who wish to ride the wave of “war against cash”.   

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