North Asian deal adds to momentum at RGB

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RGB INTERNATIONAL BHD will start supplying gaming machines to a casino operator in a North Asian country next year, with the business expected to bring in additional earnings of about US$100,000 (RM345,538) per annum over a three-year period, say sources familiar with the matter.

“It is a fixed fee contract and as a result, RGB will not be sharing revenue from the machines. It will just supply the machines and will not be maintaining them,” says a source.

The new contract, although relatively small in value, will add to the immediate momentum seeing that RGB has already posted much stronger results in the nine months ended Sept 30. During that period, its net profit jumped 198% to RM15.53 million from RM5.22 million previously, while revenue was up 50% to RM158.39 million.

In its results filing with Bursa Malaysia, RGB, which had a market value of RM158.8 million as at last Thursday, attributed its strong performance to the increase in the number of machines sold to new and existing casinos in the region. For the whole year, it aims to sell more than 1,200 machines, and thus expects to post better results.

RGB also notes that it has entered into a “fixed fee machine leasing agreement with a licensed operator” and will deliver the machines by the first quarter of 2015. While it didn’t elaborate on the size of the contract, The Edge understands that this refers to the North Asian contract that is expected to bring in US$300,000 over a period of three years.

Analysts covering the gaming segment have noticed RGB’s stellar results for the first nine months of this year. Their view is that if such a trend could sustain or grow, the stock could be deemed attractive in terms of enterprise value (EV) over earnings before interest, taxes, depreciation and amortisation (Ebitda).

RGB’s EV is at roughly RM170.6 million (market value of RM158.8 million plus net borrowings of RM11.8 million) while its nine-month Ebitda as at Sept 30 stood at RM42.65 million. This puts its EV/Ebitda at about four times, which could be lower when the full-year Ebitda is taken into account.

An EV/Ebitda of four times means the annual operating cash flow is strong enough to buy out the entire company and pay off its net borrowings in just four years, assuming that the cash flow is constant. The method is usually used to value strong cash flow-generating businesses such as gaming sector players.

Nevertheless, analysts say RGB’s low EV/Ebitda is due to its small size, compared with 9.5 times for Genting Malaysia Bhd, 12 times for the listed Macau casino operators and 10 times for the Las Vegas players.

Unlike established casino operators whose cash flows are more predictable, RGB is a small-sized equipment supplier that is subject to higher volatility in its business, hence the greater uncertainty in cash flow, as shown by its ups and downs over the past few years.

RGB sells, markets and manufactures electronic gaming machines and equipment. It also has machine concession programmes and provides technical support management for its clients.

“Beyond the recent turnaround, we foresee RGB having moderate sustainable growth. The growth opportunity in the gaming industry is currently in Asia where the company has presence. It also seems to continue its expansion in the Philippines via two ways — through expanding the traditional slot machine base and launching the new Bingo game which is popular in that market,” notes another analyst. “Looking at the stock, it is trading at a discount, which is expected because it is not big in size and is not a casino operator.”

RGB, previously a favourite among analysts, had a disastrous foray into Cambodia, which dragged it into massive losses at one point.

The Cambodian government had in 2009 prohibited sports betting and electronic gaming machines in entertainment clubs, resulting in RGB facing an immediate loss of income from over 2,000 machines it had stationed in that country. Cambodia contributed about half of RGB’s revenue at one point.

The company, then known as Dreamgate Corp Bhd, fell into the red in FY2008, registering its first annual loss of RM3.6 million since it listed on Bursa in 2004. The loss was due to impairment charges following the Cambodian government’s move to close slot clubs there in February 2009. The company would have made a net profit of RM10.4 million if not for the impairment charges of RM13.3 million.

RGB saw its net loss widen to RM64.7 million in FY2009 and it continued to stay in the red, registering losses of RM58.9 million in FY2010 and RM32.9 million in FY2011. The losses were attributed to sharply reduced revenues resulting from increasingly difficult operating environments in certain key markets.

The tide changed for RGB in 2012 when it returned to the black, registering a net profit of RM6.03 million following efforts to improve yields and cost management. It also started diversifying into other markets and depended less on Cambodia.

For FY2013, RGB recorded a slight drop in net profit to RM5.97 million from RM6.03 million a year earlier and improved its net gearing ratio to 0.53 times from 0.94 times in 2012.

At present, the company operates mainly in Malaysia, Cambodia, the Philippines and Laos. It exited Macau this year as the market was not profitable for the company. RGB also recently entered into Timor-Leste via the acquisition of a 30% stake in Timor Holding Lda for slightly over RM680,000. THL primarily operates amusement and electronic gaming machines.

This article first appeared in The Edge Malaysia Weekly, on December 8 - 14, 2014.