It has been awhile since my last blog post in January 2019. The reason being the Malaysia market has been overvalued despite the world stock market currently in a downturn due to trade war and riots in Hong Kong. But, I’m back for another key insights article about a company which I personally think you should keep a close eye on it. This company is called Revenue Group Berhad (“RGB”).
It is listed in the ACE Market of Bursa Stock Exchange on 18 July 2018. The company is a cashless payment solutions provider in Malaysia. Since listing, its share price has risen by 314%. Its IPO price were set at RM0.37 and currently, it is trading at RM1.53 per share at the time of writing this article.
Personally, I think that this company has great growth potential for an ACE Market listed company and so, I decided to split this article into two-parts. The first part is for me to explain its business model. The second part will be more on whether RGB will be able to grow further. Let’s begin.
RGB has 3 main business segments namely; 1) Electronic Data Capture (EDC) Terminals; 2) E-transaction Processing; and 3) Solutions and services. If you’ve used credit card or QR pay to purchase your favourite beverages before, chances are you’d have used their service.
As at 30 June 2018, RGB’s largest business segment are EDC terminals and E-transaction processing. To avoid long-winded article, I’ll be focusing only on these two business segments.
#1: EDC Terminals
Under the EDC Terminals segment, these are basically credit cards terminal installed in physical stores. It enables consumer to pay their purchases using credit cards or QR payments. RGB generate revenue either by selling outright the EDC terminal or through rental charges on a monthly basis.
#2: E-Transactions Processing
For the E-transaction processing segment, the business model is more complex. To understand better, let’s take a look at the process behind a credit card transaction. Usually, there are two-parts within the process:
- Front-end process. This is where the credit card is swiped using the EDC terminal. The said EDC terminal will then capture the transaction information and encrypt it.
- Back-end process. This is where the clearing and settlement process begins by transmitting the encrypted data to the Card Scheme network (i.e. Mastercard or Visa). The Card Scheme network will then obtain authorisation of payment from the credit card issuer bank and notify the Merchant’s bank (also known as Acquirer) once approved.
Usually, the Merchant’s bank/ Acquirer will charge the Merchant a processing fee for the above process. This is called merchant discount rate (“MDR”). This MDR is then shared between Merchant’s bank and the credit card issuer bank after deducting the interchange fees charged by the Card Scheme network.
All these transactions require an online platform to facilitate the process. RGB has created this (known as “revPAY”) to handle all these processes outsourced by the Bank. As such, the Company is entitled for a share of the MDR (after the interchange fees) from Merchant’s Bank or Acquirer for every transaction that goes through the revPAY platform.
Below is an illustration of RGB’s business model to aid in your understanding of their business:
One thing to note is that the revPAY not only supports credit card payments. It also supports QR payments through EDC terminals and it is able to process payments from e-commerce channels.
According to RGB’s IPO prospectus, the company was appointed by “Company A” to process outbound payments made via internet banking by Malaysian consumers who transact on their affiliate’s PRC online marketplace. This means that RGB is acting as an “Acquirer” for Company A and would receive a pre-determined commission rate based on the transaction value as revenue.
We did a little digging and we found this:
Source: Company’s Website
As such, it is safe to say that any Malaysian that buys product using Taobao.com would require to use revPAY platform to make their payments.
This e-transaction processing segment is highly recurring in nature. This explains why RGB’s revenue grew steadily from RM4.3 mil in year 2015 to RM16.7 mil in year 2018. That’s a whopping 57.2% compounded annual growth rate (CAGR) over the past 4 years.
The thing I like about Revenue Group is its ability to generate high recurring income. Usually, companies that are able to generate high recurring income are more stable.
Looking at Revenue Group business model, the more EDC terminals deployed to physical stores would mean higher rental income for the company. In addition, the higher number of EDC terminals deployed also increases Revenue Group’s share of MDR whenever a consumer pays using credit card or QR payments.
Such business model does not require significant capital expenditure. It is an asset-light model which is a positive sign because Revenue Group does not need to spend more on its asset to grow its business. It simply needs to partner with Card Schemes to offer more payment channels (e.g. JCB, Alipay, UnionPay, etc.) and e-commerce channels. This does not require any capital expenditure.
This explains why the company for the year 2018, generates a free cash flows of RM6.3 mil and it has been in a net cash position since 2017.
In my next post, I will discuss more on the growth drivers of Revenue Group and its valuation. Do subscribe to this website if you would like to receive update on my next post. You can also check out some of my past articles on REITs or increase your investing knowledge by browsing through my articles on Investing 101.