EDC contribution expected to cushion Revenue Group from Covid-19 impact

This article first appeared in The Edge Financial Daily, on March 16, 2020.
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Revenue Group Bhd
(March 13, RM1.04)
Reiterate hold with a lower target price of RM1.31:
In a recent meeting, Revenue Group Bhd (RGB) shared that it is not immune to the Covid-19 pandemic as it may weigh down on the seasonally weaker third quarter of financial year 2020 (3QFY20). Electronic transaction processing (ETP) may see declines in both online and offline volumes owing to the contractions in cross-border e-commerce orders as well as inbound tourists, especially from China. However, this may be partly cushioned by electronic data capture (EDC) which continues to experience strong demand from partner banks.

Thanks to its effective inventory planning, RGB managed to stock up sufficient hardware prior to the Covid-19 outbreak. Currently, there is an industry-wide hardware shortage as production shutdowns disrupted supply chain. In 2QFY20, partner banks purchased 12,800 units (+327% quarter-on-quarter [q-o-q]) to increase cashless touch points in the market and replace existing ones to comply with the latest security standard.

Combining with EDC rentals, RGB was managing 60,000 EDC as at the end of 2QFY20, a significant jump from about 33,000 in FY19 ended Dec 31. This bodes well for the company as it allows it to boost recurring income from monthly maintenance fee. EDC contribution is expected to grow from strength to strength going forward supported by both robust sale and rental demand.

In 2QFY20, total transaction value (TTV) gained 5% q-o-q, spurred by online megasales such as 11.11 and 12.12 to RM388 million but ETP revenue was lower q-o-q due to lower average value per transaction processed. We understand 3QFY20 is challenging due to Covid-19 and may exert pressure on ETP contribution.

Since early February, the lockdowns in China have caused logistical obstacles that led to countless delayed online order deliveries and subsequently orders being cancelled by buyers. As such, online ETP revenue is expected to be lacklustre on the back of many incomplete transactions.

On top of that, the volume of inbound tourists have plunged amid global travel restrictions leading to materially lower offline TTV. Tourism is an important segment to RGB which provides ETP services to world-renowned payment schemes including Alipay, UnionPay, JCB and NETS. On the bright side, we understand the processing traffic coming from a newly-acquired local e-commerce player is increasing every month and there is still ample room for growth.

Bursa Malaysia has approved RGB’s proposal to issue up to 45 million new ordinary share (11.6% of existing issued share capital) to third-party bumiputera investors to facilitate its Main Market listing transfer. To recap, the proceeds are largely earmarked for capital expenditure (EDC purchase), followed by revPAY and information technology enhancement and expansion, working capital and the expenses of this proposal.

We tweak our EDC and TTV assumptions, which lead to lower FY20, FY21 and FY22 profit after tax by 9%, 13% and 13% respectively. — Hong Leong Investment Bank Research, March 13