Revenue Group 37% Upside from Listing

We did not cover Revenue Group on our IPO Research but decided to subscribe the very last-minute realizing how fundamentally strong the company is. It was announced that the IPO offering was oversubscribed 11 times which make us feel that our chances of getting it had been lowered by a lot.

The opening price would likely be positive on opening day being an oversubscribed IPO but the story continues on asking which price to target for continuous accumulation.

A Brief History

Revenue Group is an back end electronics payment provider where they had been a part of this industry even before the rise of the word ‘Fintech’. According to their IPO Prospectus, AmBank had been their longest financial institution customer since 2004 and the list goes on opting for their services till date.

One thing for sure is that this isn’t a so called modern Internet based fly by night company. The integrity of their systems and credibility of their services plays a huge role in getting more and more customers to adopt their services.

The biggest name so far is China’s UnionPay services which opens up the market for them. China is the biggest market and with the number of Chinese people overseas, UnionPay had been the doorway to RMB based transactions and clearing overseas.

Taobao listed RevPay as one of their partners in their site.

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Upcoming Development

With UnionPay services intact, this round’s IPO proceeds will lead the company to frontier markets of Cambodia and Myanmar for growth. Both very close to China and both very under-developed markets especially for online payments will provide a good prospect for Revenue Group’s growth.

Providing these services, it is best to be the market leader rather than 2nd in place because it is pretty clear that these types of companies naturally grow bigger and bigger due to economies of scale. The same infrastructure for services could be replicated easily with small modifications for each unique customer thus, economies of scale could be achieved easily.

This is why front-line services providers in the online transaction and payment industry grows bigger every year. In fact, at the end of the day, bigger actually means higher credibility similar to banks.

Fundamentals

Consistency over the years were shown in terms of profit and loss. The company registered strong margins for gross and even after tax. The revenue growth had been smooth as well and all that proves that the business structure had been successful in Malaysia.

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With a strong base locally, the company could undertake new investments into frontier markets Cambodia and Myanmar. Any kinks and bumps along the path of expansion could be buffered with their strong performance locally and possibly seize a few more customer’s in Malaysia along the way.

We think that at times, an IPO could be a marketing campaign for a company where in this case, awareness towards Revenue Group had been created through this IPO. We now know who’s behind those transaction systems. Brand image improves and being a highly known brand automatically improves their credibility. Which points back to the most important thing for provider of these services.

Indeed, the money raised could have been done through private placements where Revenue Group could still be a Sdn Bhd but the effect of listing improves the awareness of the public somewhat similar to Alibaba’s re-listing/US listing not long ago. Alibaba renewed their presence in the world and gain the awareness from the US side ditching Hong Kong listing where they delisted from there earlier.

Valuations

We think that based what’s written on the prospectus, the Post-IPO market capitalization would put the company’s value at RM 82 million.

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Although not the best to compare with Revenue Group, we chose Manage Pay (MPAY) as reference and the company is currently valued at RM 113 million. But sadly, MPAY isn’t a performer in terms of profitability. The firm started to make losses and eventually stressed the balance sheet acquiring retained losses as reported in the latest quarter.

Our conservative estimate puts the company’s valuation is only RM 100 million. Meaning we suggest that IPO pricing of RM 0.37 would see a RM 0.45 listing price or a gain of 20% from listing.

We wouldn’t be surprised if Revenue Group trades at a market capitalization of RM 113 million similar to MPAY’s. That would see the share price trading at RM 0.50 per piece or a 37% gain!

Listing Date

Our target buy is to collect on weakness at market capitalization lower than RM 100 million (maybe closer to RM 90 million side). On listing date, if the opening price is way up above 20%, we would take profit first and collect more when the market calms.

That strategy depends on how many shares would be allocated as well. With 11 times oversubscribe, we felt that only 30% of total subscription would be fulfilled.

Would follow up when it’s closer to listing date. Congratulations to those who subscribe, this company is rare to come by for the Malaysian market.

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NovaMSC – Singapore’s very own MYEG?

NovaMSC could be seen trading among the top 5 in terms of volume day after day on the Malaysian market. The stock almost doubled in 1 month propelled by order book replenishment and a sudden explosion in contracts received over these periods.

The stock wasn’t covered under CIMB’s Research team but getting as hot as it is now, they too decided to publish a short introduction to the company.

Do you think you should have a piece of this? Have a look at their latest report!

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Two Non-Moving Counters in Collection by Institutions

Most counters had been rising quick and sharp since the dip from last week but VS and SKPRES had yet to move following the broad market this time around.

For obvious reasons, VS and SKPRES are makers of plastic products for the famous brand Dyson and GBP is the biggest threat to them so far. Much like stock prices spiking for exporting counters when you see the USD strengthened three years ago, the weakening GBP had caused these two counters to follow suit.

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GBP dropped significantly due to Brexit and we felt that it would remain weak for the time being. Nevertheless, these two counters has value with the availability of capacity to deal with continuous order increases.

The only doubtful factor would be a range of new products by Dyson that might not include SK Pres and VS in their OEM supplier list. All things remain constant, we believe that these two counters are cheaply priced for the time being neglecting the fact that external risk could still point downwards.

We think that it is worth to collect some if you had made profits from this rise as it is hard to find counters which are high in value after this rally.

Looking at institutional transactions, they had began collecting these two counters in anticipation for a better GBP strengthening in the coming months or so.

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Net-off, both counters see addition by KWAP but VS seems to be more aggressively bought by them so far. You be the judge on which to buy. We like both!

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Chart wise, both trades similar as well and we are on the lower side of things than what it was starting this year alone.

SKPRES down 50% YTD

VS down 29.5% YTD

Inari Amertron Growth Growth & More Growth

New Facilities

P13 – Completed
– To add 250 RF testers to its existing 970
– A 25% gain in capacity

P34 – Batu Kawan to be completed in September 2018
– LED facility for OSRAM

Segments

Iris Scanner – Falling shipments
– Implementation other than smartphones would be considered

Amertron – Philippines efficiency upgrade underway

Referencing from CIMB’s Report

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CIMB on Inari Amertron

Our top pick post election due to expectation of weakening ringgit reported its results yesterday. As expected, revenue should see a decline Q-o-Q but the profit remained solid.

As the report from CIMB tells us,

We learnt that the second phase expansion at P13 had recently been completed. The second phase could add another 250 RF testers, raising Inari’s capacity to 1,200 units. Following completion, P13B plant will be the largest plant in the group with a total manufacturing floor area of 340 sq ft. The group is in the midst of getting production equipment and it expects to start ramping up production from Jul onwards.

We think that indeed it is still a growing company. Expect the price to trade close or breach to its previous high of RM 2.50 (adjusted after bonus issue)

Have a look at the report!

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QL Resources – It’s Really Getting Expensive

We gave a buy recommendation for this company a long time ago (Aug 2016) and we held to it since then.

You can see our post from 2016 here.

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There really isn’t much to say rather than continuous revenue growth quarter over quarter. That is why you don’t see many follow up post other than the Family Mart review that we gave earlier. But it really gets a little tricky now.

With EPF and Amanah Saham scooping up the shares from the open market, it pushed the price up and so as the PE rising steeply. We bought in while it was trading at a PE of 28 but it turned to 42 at the current price.

Obviously the consumer sector gets a boost with GST being zero rated but this stock trades 2nd most expensive in valuations among the other big names with Nestle leading the way demanding the highest premium.

At the current price it is trading, we believe that a review is needed on what to come and either it is still worth holding past this quarter’s results which would probably be reported next week.

Revenue Growth

The revenue had grown close to RM 450 million in the over the past 2 years and we are still awaiting those growth numbers to translate into net profit. We believe that market had expected net profit to catch up with the revenue growth and paid a high premium for it.

Furthermore, our revenue growth target by 2020 were estimated to be RM 700 million a year. RM 450 million growth over these two years showed that more than half of the target had been fulfilled. With two more years to go, the actual would actually breach our estimate earlier and re-value the stock price higher.

But Could Earnings Catch Up?

A quick dive into the gross margins. We compared gross margins and net margins two years ago versus last 4 reporting quarters

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Straight off from the table above, we can tell that gross margin as well as net margin declined by merely less than 1% while revenue grew 15% over the last 2 years.

Being very involved focusing on growing the revenue, increasing the efficiency of the new business segment might be neglected. New operations such as frozen products manufacturing, broiler and layer farms are likely the reason why we see lower margins overall.

We then take a look at the segments reported.

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That being said, we should still place some hopes that margins will catch up when the new operation facilities gets oiled up smoothing operations and efficiency.Except palm oil activities, the other two segments see a decline in margins reported which proven our earlier guess correctly. Normally, this is the common case for a business which sees a sudden growth in revenue.

Renewing Valuations

Assuming that in FY2020 we see another RM 350 million rise in revenue which translates to forward FY2020 EPS of RM 0.141, we are looking Forward PE of 18.38 at the current price versus the current PE of 42.

The gap between forward PE versus current is huge when we first evaluated this company. The stock was trading merely PE of 28 versus our forward PE estimate of 14 times earnings.

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To Sell or Hold?Things had really gone expensive over these two years and we really think that it get expensive. From our initiation which we thought to be expensive to higher valuations at the moment, it really sets us in a dilemma.

We think that we could still squeeze in one quarter before start liquidating our positions. This quarter’s report would include the month February which is Chinese New Year. We believe the CNY effect is big and makes it QL’s top month compared to any other.

Much similar to Nestle, which broke record revenue for Q1 2018 with RM 1.4 billion in revenue, we are betting on increased consumer spending for Q1 2018 as well for QL Resources.

Nestle Revenue
Q1 2018 1,429,670
Q4 2017 1,281,725
Q3 2017 1,323,253
Q2 2017 1,283,630
Q1 2017 1,371,882

We would maintain a HOLD if the revenue for Q1 2018 breaches all time high of RM 892 million. But we would immediately SELL at opening price if the revenue is below the the all time high.

Pentamaster – KWAP Entry a Good Sign

We think that the subdivision and bonus issue last November was done to increase the number of shares allowing KWAP to come in. Obviously without liquidity the stock gets a little volatile and most institutions do not like volatility on collection stage.

As we can see from the latest annual report, KWAP owns 11.6% of the company and we think that with the management luring KWAP’s interest into their company would be a value added in terms of stock pricing.

Somewhat like INARI few years ago, with the appearance of institutions such KWAP inside the shareholding structure, it pushed the stock price upwards demanding higher valuations. The simplest way to tell is that it trades at a PE higher than its peers.

Introduction of institutions at times see re-valuation for the stock itself making it somewhat more ‘valuable’ than a non-institution owned. That is why we can be ahead when institutions are buying smaller companies.

Rights Issue?

If we are KWAP, we would suggest a rights issue to increase the number of shares and probability of a dilution in case one might forgot to subscribe (it can happen to retail). Furthermore, newly acquired cash can be used for capital expenditure.

Once again we reference this to INARI’s case when KWAP came in and started acquiring in 2014. The rights issue were executed for the development of new factories but weirdly the company still has cash and paid out dividends the next quarter. Investors might be asking “why did you take money from us in the first place?”.

It could be that the actual cash realized from the growth in revenue exceed their forecast and expectation. But it is not common as well to see companies using rights issue to increase the share issue size allowing new investors to come in or increase the ownership by diluting their minority shareholders who are unaware.

What To Expect Now

Expect to see increased interest from institutions with more and more liquidity introduced to this counter. Not only we see KWAP but hopefully more institutions like EPF would take part in this counter as well.

We are not confident with the upcoming report as we believe the US dollars from the month of Jan 2018 to Mar 2018 would work negatively towards the company’s earnings report.

Nevertheless, if you do not care about temporary setback for pricing then the chart actually points to return higher as it broke its downward trending line when it hit RM2.40 a week ago.

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