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More options for investors to ride on e-payment trend

HL and ManagePay are expected to benefit from the Digital Free Trade Zone project

The e-payment players have different levels of profitability and valuation

Investors who seek to ride on the rising electronic payment trend now have a wider pool of selection to tap into.

Recently listed Revenue Group Bhd joined the bandwagon of listed e-payment service providers and fared well on its listing day on the ACE Market, closing at an 87.8% premium to 69.5 sen versus its initial public offering price of 37 sen.

GHL Systems Bhd and ManagePay Systems Bhd are the existing listed e-payment service providers, which are expected to benefit following the announcement of the Digital Free Trade Zone (DFTZ) project in Malaysia by Alibaba’s Jack Ma.

Though running a similar business of providing e-payment services by deploying electronic data capture (EDC) terminals at merchant outlets, all three players have different level of profitability and valuation.

Other than income from the sale and rental of terminals, they also help to facilitate transaction at the back-end on behalf of acquiring and merchant banks.

Of the three, ManagePay has been operating at a loss since 2015. In the fiscal year ended Dec 31, 2017, the net loss widened by 45% year-on-year (yoy) to RM6.41 mil, from RM4.92 mil the year before, despite a 34% increase in revenue to RM8.18 mil from RM6.09 mil.

In contrast, GHL and Revenue Group are in the black. The newly-listed player posted a net profit of RM6.93 mil in the year ended June 30 2017 on the back a turnover of RM26.52 mil.

Meanwhile, GHL recorded a higher net profit of RM20.54 mil from RM18.12 mil in the fiscal year ended Dec 31, 2017 while revenue rose to RM255.58 mil from RM245.92 mil in the previous year.

Of the three, GHL is valued at the highest price to earnings ratio (PE) of 51 times based on earnings per share (EPS) of 3.13 sen as of FY17. The counter closed at RM1.60 on July 18.

Meanwhile Revenue Group was valued at a PE of 12 times, far lower than its peers but nonetheless a decent valuation when it was slated for listing.

Why is there such a huge spread in valuation despit being involved in a similar business?

More options for shareholders

A fund manager who closely monitors the e-payment landscape in Malaysia says the premium in valuation GHL enjoys over its peers is probably owing to market perception and the limited range of choice before the listing of new players like Revenue Group.

“GHL is a market leader by number of acceptance points and network. Moreover it has e-pay under its belt - the country’s largest provider of reload and collection services,” he says.

Hence it is not strange that shares of the company are highly sought after by investors. Nevertheless, with Revenue Group joining the bandwagon, he expects investors to shift some capital to the newly-listed company as well.

The listing of Revenue Group has indeed piqued investors’ interest. Its share price jumped to 80.5 sen on July 23, rising more than twofold its 37 sen debut price.

The huge spread of valuation between GHL and Revenue may have sent a signal to the market that there is more upside for the latter to grow, hence prompting a buying spree in the last few days.

While the valuation gap between the two would probably narrow over time, the fund manager believes eventually GHL may still command a premium over Revenue.

“Ultimately GHL is the market leader. Moreover, with its operations abroad, in Thailand and the Philippines, as well as the steady contributing e-pay business, it is expected to trade at a premium,” the fund manager says.

Growing business volume

GHL has about 36,350 acceptance points nationwide for e-pay, encompassing all petrol chains, convenience store chains and general retail stores.

In exchange for the infrastructure and work done, GHL recognises the merchant discount rate (MDR), which is calculated based on the percentage of transaction value, as revenue for the segment.

About 55% or RM139.4 mil of its total revenue stemmed from providing telco prepaid and top-up facilities, and bill collection services to consumers via e-pay.

However, the MDR margin for the e-pay segment (calculated by dividing gross revenue over total transaction value) has been shrinking since 2014 when GHL first disclosed the breakdown of key details of the business in its annual report that year.

The MDR margin was down by 30 basis points to 3.7% in FY17, from 4% the year before, despite the increase in transaction value by 3.6% to RM3.76 bil in 2017 as transactions on bill collections and non-mobile reloads (which have a lower MDR) outpaced growth in prepaid mobile reloads.

On the other hand, GHL’s revenue from e-payment services, which is a comparable segment to ManagePay’s and Revenue’s mainstay, amounted to RM114.3 mil.

The segment also faced a lower MDR margin of 1.1% versus 1.2% a year earlier on account of the stiff competition in the market for merchants as banks compete in MDR and monthly rental.

To arrest the declining margin in both segments, GHL group CEO Danny Leong tells FocusM that the company will continue to grow its business volume.

The incremental cost to support merchants as volume grows is minimal for the company, he adds.

Leong expects margins to stabilise over the long term as more merchants come on stream and overseas transaction payment acquisition (TPA) in the Philippines and Thailand gradually gain momentum.

GHL’s acquisition of PaySys (M) Sdn Bhd for RM80 mil this year would further cement its leading position among e-payment solution providers by the number of terminals.

The acquisition would certainly contribute to the performance of GHL, but some shareholders see little reason for the latter to acquire a company that is merely involved in the sale and rental of EDC terminals. As such, some shareholders deem the acquisition would do little in lifting GHL’s overall profit margin.

The net profit margin for GHL as a whole stood at 8.1% in FY17, down from 7.3% the year before.

Leong stresses that the acquisition of PaySys will contribute positively to the top and bottom lines. “More importantly, it will enable us to cross sell our existing products and services to the existing PaySys base,” he says.

The company received another boost recently after it was roped in as a direct merchant party acquirer for UnionPay International for the local market.

This means GHL will be able to offer their merchants the facilities to accept UnionPay, a widely used card scheme among Chinese citizens. GHL aims to roll out the service to 5,000 merchant outlets by August.

Leong adds that the collaboration with UnionPay will help improve GHL’s total transaction value processed, revenue and gross profit.

“But the margin will be similar, as the spread (net MDR) will be similar to our existing payment products.”

Of the total number of payment cards in circulation of 13.6 billion in 2016, 44.9% or 6.1 billion of it were from UnionPay network. MasterCard and VISA collectively commanded about 35% in market share of cards in circulation, and the rest were from card schemes like American Express, JCB, Diners Club, domestic and private label cards.

UnionPay collaborates with over 10 partners including Revenue Group for acquiring and issuing activities locally. Revenue Group has been collaborating with the card scheme since 2011. FocusM

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