5 Minute Read: REVENUE (0200) REVENUE GROUP BERHAD
REVENUE (0200)
Listed in ACE Market July 2018, Revenue Group Bhd is mainly a payment
solution platform provider. The company provides rental and sale of
electronic data capture (EDC) terminal, EMV Smart Card Technology,
Terminal Management System, Loyalty System, Consumer Behavioural
Management System, Web-based Payment System, and Payment Transaction
Management System. The company alliance partners include AmBank, Affin
Bank Real Rewards, Comex GeneSys, Visa, MasterCard, MEPS, VeriFone,
Petronas, Touch ’n Go and many more. The company provide the latest
technological framework while keeping operational low costs and provide
the supporting infrastructure for who need it.
Business Model
It has three segments which contributes to its business revenue:
Electronic Data Capture (EDC) terminals
EDC terminal, as shown in the Figure above, is a device used to read
information encoded in bankcard's magnetic stripe, perform
authorization, store and transmits the data to the acquirer for
processing. In simple terms, the EDC machine act as a middleman that
allows you and the merchant to perform transactions in a cashless
environment. It contributes to an average 45% to 55% of its total
revenue, and its gross profit margin (GPM) stands at around 40% to 50%
including its rental, sales and maintenance of the EDC terminal.
Electronic Transaction Processing (ETP)
Electronic transaction processing, as its name suggest, is a profit
received when a transaction is processed. When the EDC terminal is used
for transactions, REVENUE takes up certain amount of commission in every
bankcard's transaction value called Net Merchant Discount Rate (MDR).
It also generate revenue from a pre-determined commission earned from
the processing of electronic transactions via e-commerce or mobile
channel like e-wallet transaction (Touch'N Go, Grab, etc). It is the
SECOND largest contributor to REVENUE's revenue taking up 30% to 40% of
its total revenue. Its gross profit margin stands at a high of 75% which
really are the money-making tree for REVENUE. If there are more
transactions, there will be more ETP generated.
Solution, Shared Services
In the solution, shared services segment, the group provides IT
solution and services, digital payment services, and procurement
logistic services. Although its generated revenue is small, it is slowly
growing since 2018 and its margin is really high too, standing at
around 75% to 80%.
Financial Health
Revenue & Profit Margin Growth
To evaluate whether a company is performing well, the first condition
is it must be growing steadily. You can see from the figure above that
from 3-2018, The Group's revenue has been growing at least 40% a year.
This is a REALLY GOOD sign that the group is currently on the right
track and the products and services that they provide are in high
demand. Its NET profit margin, maintained above 12% for the past 8
quarters.
Balance Sheet Strength
Current Ratio (CR) is currently 2.11, which is considered healthy.
Debt-to-Equity ratio (D2E), is at 0.51 which shows the company has
minimal debt and its cash flow are still healthy for the company's
normal operations. In the Group's Annual Report 2019, You can see the
receivables increased by RM10million (almost 100%), and its payables
also increased by RM6 million (160%), indicating the company has HIGH
demand on its products, where its inventories also increased by RM4.42
million. The debt has been growing, but the Group has been managing it
well to keep the CR above 1.5 and D2E under 0.5. Any sign of D2E above
0.5 should be a warning sign.
If the company's receivables is significantly higher than its
payables, it might face difficulty in cash flow, because no one is
paying the company's money and its difficult to continue operations. To
understand this, we look at its cash flow statement:
To make things simpler for everyone else and make this article not
100,000 words, I will just talk about the overall view from its cash
flow. Net cash generated operating activities has decreased RM10 million
as compared to last year, because the company bought a lot of new
equipments (Inventories) as I said before, and its increment in
receivables is higher than its payables, it will have a decrease in net
cash. However, you can see the company's confidence in its expansion
where its net cash used in investing activities increased by RM6million.
Its net cash from financing activities increased by 18 million, mainly
attributed to the money raised from its initial public offering (IPO).
Management Overview
The Group is lead by Mr. Eddie Ng Chee Siong, The CEO which has 15
years of experience in local electronic payments industry. In 2003, He
co-founded Revenue Harvest with two of his friends Mr. Brian Ng and Mr.
Dino Ng ShihFang. Mr. Brian, the Chief Operating Officer (COO) who was a
senior engineer of an optician R&D department help led the
day-to-day operations of the group. Mr. Dino, the Group Technology
Officer is responsible for payment security related systems. Good as
everyone is very experienced.
Major Risks
- Heavily reliant on major customers. If one customer stopped working with the group, the group may incur heavy losses.
- Moderately affected by the fluctuations in USD/MYR exchange as EDC terminals are purchased in USD. Depreciation of MYR will increase the expenses and lower the overall margin of the operations. Its also affected by China RenMinBi/MYR as one of their online merchants operates a marketplace (e-commerce) in China.
- Rapid changes in regulations where the current technology become obsolete. The group might have to write off or impair big amount of equipment at the time they are required to follow new regulations. However, the group continue to innovate and maintain its products to the latest technology.
Valuations
- Price-to-Earning Ratio (P/E) - 50
- Return on Equity (ROE) - 16%
- NTA - 0.27
First of all, is P/E ratio of 50 high? It looks high right? A high
P/E ratio can mean two things, either the company is overvalued (Value
Investing), or its stock are highly demanded (Growth Investing). An
electronic payment stock cannot be simply evaluated by looking at its
P/E, because its an up-trending & growing stock in a rapidly
escalating industry. Comparing to its peer, GHLSYSTEM which has been
listed for more than 10 years, has a P/E of 43. Paypal, the world's
largest electronic payment system, has a P/E of 50. Hence, P/E ratio of
50 for Revenue can be considered FAIR.
Its ROE stands at 16%, which is healthy as long the group is able to
maintain a good ROE quarterly. Some industries have a high ROE as they
require little or no assets while others require large infrastructure
builds before they generate profit. For Revenue which has very high
margin, I will expect an ROE of at least 15% and above and any value
below that will indicate a bad management either in cost management and
margin control. NTA is slightly low compared to its price but it is fine
for an IT stock as it has been growing for the past 8 quarters.
My Evaluation
E-wallet has been trending where the government has been pushing
initiatives like E-Tunai Rakyat program encouraging people towards
cashless environment. This will continue to be the main driving force
for the Group's revenue as the current market exposure towards cashless
environment are still little. Eventually, revenue generated by
electronic transaction processing will be more than EDC, as there will
be only be limited growth of total merchants but ample space for ETP to
grow. Revenue's competitor GHL, currently has an ETP of 65% to 35%
roughly of ETP vs EDC whereby Revenue is currently at 45-45-10
(EDC-ETP-SS). Bear in mind that there might be sign of a stagnant market
whereby its ETP earnings has been growing slower as compared to 2018.
This might be an indication of a market stagnation where the market
already has enough EDC terminals.
At this point of time of writing, fears of Wuhan continue to loom and
IT IS EXPECTED than The Group's earning in ETP and EDC will be affected
as economy grow slower (they are dependent on total spending in the
market). I still favor electronic payment industry very much and with
only two company to choose from the sector, Revenue perform
significantly better than GHLSystem (I might write this in another post
in the future) in terms of their margins, growth and prospects. To fight
Wuhan virus, China banks are destroying and disinfecting $600 billion
paper notes (Yuan) and this further improved my prospect towards the
benefit of a cashless society. In the future, cryptocurrency (cashless)
will be ruling over paper notes and I foresee a slightly worse economy
projection in Malaysia 2020 but surely the sky will be blue after
everything settle down. Who knows it might a blessing in disguise for us
investors?
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