This article first appeared in The Edge Malaysia Weekly on January 16, 2023 - January 22, 2023

NEWS that e-payment solutions provider Revenue Group Bhd had suspended two of its executive directors, and that it was investigating “complaints” received against the duo, not only shocked the investing community but has also raised concern that goes beyond whether the company’s operations can continue as normal.

Inevitably, questions have arisen about corporate governance at the company and even its financials, given that it slipped into losses in its first quarter ended Sept 30, 2022 (1QFY2023).

The two directors, who are also co-founders and substantial shareholders of the company, are brothers Brian Ng Shih Chiow and Dino Ng Shih Fang. Their executive powers were suspended on Jan 4, following “complaints” received against them.

On the same day, Dino and a few individuals allegedly seized 30 boxes of documents belonging to the company, according to the company’s filing with Bursa Malaysia.

Revenue Group then lodged a police report in relation to the complaints of illegal forced entry and alleged theft. The company said it was considering engaging two independent professional firms to conduct a special review on the matters.

Prior to the suspension, Brian was the group’s chief operating officer, overseeing the group’s day-to-day operations, administrative and finance functions.

Meanwhile, Dino, as the group’s chief technology officer, managed the research and development (R&D) and IT teams as well as monitored the development advancement of new technologies for potential new products and services.

In response to queries from The Edge, the company’s managing director and co-founder Datuk Eddie Ng Chee Siong (no relation to the siblings), stresses that, for mid-level management, it is “still business as usual”.

“We have a business continuity plan and backup personnel. The case is not as bad as what the market expected. We also have [new CEO] Danny Leong on board; it definitely helps,” Eddie says.

In a swift move, a few days after the suspension of the two board members, Revenue Group appointed industry veteran Leong as its CEO — a post held by Eddie previously. Leong is former CEO of GHL System Bhd, a competitor of Reve­nue Group.

UOB KayHian believes Revenue Group will still be able to continue operating as usual under Leong, who has more than 28 years’ experience in the industry, having led and steered the growth of companies across Asean.

It cautioned, however, that the ongoing tussle between the major shareholders may continue as an overhang on the company’s share price, owing to uncertainty over the group’s strategic focus in the future.

As such, UOB KayHian cut its target price for Revenue Group to 45 sen per share with a “sell” call. “We reckon that the company’s share price may continue to underperform in the short term, given the uncertainty,” it says.

An analyst with a bank-backed research house foresees changes at the top, thus posing a risk to its business operations. The bright spot is that China’s reopening is set to benefit the group in terms of higher e-payment transaction value.

News of the suspension caused Reve­nue Group’s share price to tumble as much as 29.4% to a low of 48 sen on Jan 5, against 68 sen on Jan 4. The selling pressure continued last week, with the stock touching a low of 45.5 sen last Friday.

Because of the sharp fall, Eddie had to force sell three million shares on Jan 6 at 50.2 sen each, paring his shareholding to 8.33%, from just over 10% a year ago.

Brian and Dino are still the two largest shareholders, with a collective interest of 22.79%. Other major shareholders are Kenanga Investors Bhd (4.76%) and Kenanga Growth Fund (4.51%).

On Jan 9, Brian sold 1.2 million warrants, or 0.77% warrant holding, on the open market at 13 sen per unit, reducing his holding to 14.1%.

On Jan 6 and 9, Dino offloaded his entire 2.74 million warrants, or 1.75% warrant holding.

Closing at 48.5 sen for a market value of RM233.86 million last Friday, Revenue Group’s share price has shaved off two-thirds over the past one year.

The counter has been on a downtrend since its peak of RM1.78 in March 2022 on the back of its planned foray into the digital banking space with Kenanga Investment Bank Bhd and the Sarawak government.

Nonetheless, the consortium failed to make the list when Bank Negara Malaysia announced the five winners of the digital banking licence in April 2022.

An analyst with a non-bank-backed research house points out that there could be changes to the group’s shareholding structure in the event of an unfavourable outcome in the investigation against Brian and Dino.

“We are not sure whether Brian and Dino will dispose of their shares in Revenue Group, whether on the open market or to third parties,” she says.

Revenue Group posted its first quarterly net loss of RM3.33 million in 1QFY2023, since its listing on Bursa Malaysia in July 2018.

The lacklustre performance was due to lower gross profit and higher administrative expenses. The company’s cost of goods sold more than doubled to RM12.66 million, although its revenue rose only 10.5% to RM20.8 million. As a result, its gross profit shrank to RM8.15 million in 1QFY2023 versus RM12.89 million a year ago.

Meanwhile, its administrative expenses swelled by 39% to RM10.98 million, from RM7.89 million, owing to an increase in staff cost, realised and unrealised foreign exchange losses, higher connectivity cost and higher interest expense.

The analyst observes that the higher cost incurred during the quarter was due to the need to hire more IT expertise for the group’s business expansion.

“It is unclear whether Revenue Group will continue to see high costs in 2QFY2023, but the condition should improve from 3QFY2023. Right now, the company is working on cost optimisation,” she says.

Its business operations are divided into three segments — deployment of electronic data capture (EDC) terminals, electronic transaction processing (ETP), as well as solutions and services related to payment infrastructure.

The group has 106,000 payment terminals in Malaysia, according to its latest annual report.

ETP revenue is derived from a net merchant discount rate (MDR) from the processing of electronic transactions via the EDC terminal channel; pre-determined commissions; a share of net MDR as a third-party payment processor; as well as a share of the net MDR as a master merchant.

Despite the high IT-related costs, Rakuten Trade in its Dec 8 report says continuous improvements made on the EDC terminal, processing, solution and security will enable Revenue Group to gain more market share and build a stronger recurring income stream.

It says: “Revenue Group is envisioned to build its B2B2C ecosystem and is still on track with its growth plans.”

Nonetheless, the pricing competition remains a challenge for the company. Its operating margin is expected to narrow because of a lower discount required from the banks amid efforts to expand its market share in the EDC terminal space.

“On top of that, we expect the ETP segment’s operating margin to narrow [because of] weaker consumer spending as well as the lower MDR rate, given the strong market competition, especially from the e-wallet and BNPL (buy now pay later) players,” UOB KayHian said in its Nov 30 report.

As the EDC terminal segment matures, Revenue Group has been looking to further grow its ETP segment, which saw its contribution to the group’s top line increase from 20.6% in FY2021 to 29.7% in FY2022.

The EDC terminal segment remained the major revenue contributor at 53.7% in FY2022 versus 64.8% in FY2021.

Also, as part of efforts to boost its ETP segment, Revenue Group last year launched its wannaPay e-wallet, with key features such as shopMyairports, China’s health declaration certificate application, and UnionPay QR.

In FY2022, Revenue Group recorded a higher net profit of RM13.44 million compared with RM11.25 million in FY2021. Its net profit margin slipped slightly, however, from 14% to 13.2%. Consensus forecasts are that its FY2023 net earnings may come in lower at RM9.33 million before a pickup to RM13.2 million in FY2024.

In terms of financials, the saving grace is that the group has been in a healthy cash position. It had net cash of RM36.8 million as at end-September 2022, albeit lower than the RM45.1 million as at end-June 2022.

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