PENANG-BASED electronic gaming and amusement machine manufacturer RGB International Bhd (fundamental: 1.7, valuation: 1.8) is looking to regain lost ground since its disastrous foray into Cambodia.
RGB managing director and substantial shareholder Datuk Chuah Kim Seah says the worst is over and the company now aims to restore its share price and net profit to pre-crisis levels within three years.
He says there is strong demand for gaming machines, in view of the anticipated opening of new casinos and gaming establishments and the expansion of existing integrated resorts in Asian markets.
“RGB will be a growth stock in the coming years. In 2007, our net profit was more than RM39 million and our share price was 60 sen. We want to revisit those levels, hopefully by 2018,” says Chuah.
RGB is 29.29%-owned by the 61-year-old Chuah who has been involved in the gaming and amusement industry for more than 27 years. His younger brother Kim Chiew is also an executive director of RGB with a 2.28% stake.
With a current base of 1.18 billion shares, RGB’s market capitalisation could reach RM708 million should the stock climb back up to 60 sen.
RGB had a market cap of more than RM500 million in 2007 but this fell to RM135 million at the end of 2008, following the market meltdown. RGB closed at 15 sen last Thursday, and had a market cap of RM177 million.
“It’s not difficult, but we must work on fundamentals. When we were down (in 2008), [some investors] ran away but we stayed on and came back into the black. We started to declare dividends in 2013 and hope to continue this trend,” says Chuah.
To recap, RGB ran into trouble in its financial year ended Dec 31, 2008 (FY2008), when the company reported its first annual loss of RM3.61 million after its listing on Bursa Malaysia in 2004.
The loss was due to impairment charges resulting from the Cambodian government’s move in February 2009 to prohibit sports betting and electronic gaming machines in entertainment clubs. RGB suffered an immediate loss of revenue from more than 2,000 machines it had placed in the country.
The company ventured into Cambodia in 2003.
RGB continued to register net losses of RM64.75 million, RM58.9 million and RM32.89 million in FY2009, FY2010 and FY2011, respectively. It made a comeback with a net profit of RM6.04 million and RM5.97 million in FY2012 and FY2013, respectively.
For the first nine months ended Sept 30, 2014 (9MFY14), RGB’s net profit stood at RM15.532 million. Chuah expects RGB to do better for the full year and says it should continue to perform in FY2015.
“Conservatively, we aim to achieve a net profit growth of at least 5% per annum for the next three years — FY2015, FY2016 and FY2017,” he says.
However, RGB will have to do a lot better than grow its net profit by 5% a year if it is to return to its FY2007 earnings level of RM39 million by 2018.
RGB is primarily focused on the sales, marketing and manufacturing of electronic gaming machines and equipment. It also offers a machine concession programme and technical support management.
As at Sept 30 last year, the revenue of its sales and marketing (SSM) division stood at RM104.47 million, while its technical support and management (TSM) division accounted for RM53.5 million. As for profit before tax, SSM contributed RM9.8 million, and TSM, RM13.3 million.
For FY2014, the SSM division exceeded its sales target of 1,200 units, selling 1,450. This was 33% higher than for FY2013.
“We should be able to achieve similar sales in 2015. Meanwhile, our TSM division is still growing and, due to lower depreciation of our machines, I don’t see why we cannot achieve growth,” he says.
RGB operates in Malaysia, Cambodia, Philippines and Laos. Last year, it exited Macau and entered the Timor-Leste market.
Chuah says RGB is looking to break into India and Sri Lanka, whose governments are considering liberalising market regulations to create job opportunities for locals.
“They hope to bring foreign investors and tourists to their countries. There are some big players eyeing that part of the region to operate casinos and gaming establishments.
“We see huge potential in these countries. Once the casinos and gaming establishments plans [of India and Sri Lanka] are finalised, we should be able to secure more sales,” he says.
Chuah also confirms a Dec 8, 2014 report by The Edge that cited sources who said that RGB will start supplying gaming machines to a casino operator in a North Asian country in 2015. The business is expected to bring in an additional US$100,000 (RM356,900) per annum over three years.
“Yes, we have signed a fixed-fee contract. The first batch of 100 machines is in transit to the venues,” he says, adding that RGB also plans to invest in machine concession companies in the Philippines and the North Asian country.
“We are not buying a controlling stake, so our shareholding will not be more than 30%. New countries need to tap our expertise. By taking a small stake in these companies, we can have another revenue stream (besides the contribution from TSM division),” says Chuah.
He reveals that RGB is also exploring the possibility of a private placement exercise this year, the proceeds of which will allow the group to partly fund these acquisitions.
“We plan to raise funds for working capital and pare down borrowings to finance the new projects,” says Chuah.
RGB had made a major repayment of RM13.7 million on its commercial paper (CP) in the first nine months of last year, reducing its net gearing to 0.26 times as at Sept 30, 2014, from 0.61 times a year ago.
As at Sept 30, 2014, RGB had RM39.9 million outstanding on its CP, with another RM10 million on its medium-term notes.
Effective February this year, RGB successfully completed the transfer of its entire CP programme to a single-note holder, lowering its rate from 10% to 7% and saving on interest costs.
This article first appeared in The Edge Malaysia Weekly, on February 9 - 15, 2015.