$RGB / 0037 (RGB INTERNATIONAL BHD)

10 June 2024

RGB International Bhd (RGB) @ 42.5 Sen – A Gaming gem with valuation of 60 Sen to 72 Sen

Currently at 42.5 Sen it is trading at historical PE 10.81 based on CORE EPS of 3.93 Sen (audited EPS of 1.65 Sen for FY 2023 adding back all exceptional expenses per attached Excel Worksheet).

RGB at 42.5 Sen, presents an enticing investment opportunity with substantial upside potential. Our analysis suggests a conservative valuation range of 60 Sen to 72 Sen, reflecting a compelling 41% to 69% upside, contingent upon the Mr. Market's recognition of RGB's true value.

Valuation
Our valuation is underpinned by robust financial modelling, projecting an EPS of 6 Sen for FY 2024. This projection is supported by the recent securing of a significant contract worth RM381 million for the supply and delivery of Slot Machine Equipment in FY 2024. Based on a PE range of 10 to 12, our model suggests a fair valuation of 60 Sen to 72 Sen.

Financial Performance
RGB's Q1 FY 2024 results demonstrated a remarkable improvement over FY 2023, with a revenue of RM210 million and reported a PBT of RM25.276 mil and a PAT of RM22.005 million with EPS of 1.44 Sen. Compared to FY 2023 where the revenue was RM699 mil with PBT of RM32.79 mil (the adjusted core PBT after adding back the exceptional expenses was RM72.125 mil) and the PAT was RM34.0 mil (Core PAT = RM60.546 mil) with an EPS of 1.65 Sen (core EPS adding back exceptional items = 3.93 Sen).

Notably, the company reported no bank borrowings and maintains a healthy cash balance of RM185.5 million, indicative of its strong financial position. Additionally, RGB has consistently generated positive operating cash flow, with Q1 FY 2024 recording RM24.4 million.

Catalysts for Rerating
Several catalysts support our bullish outlook on RGB:
• Exceptional Q1 2024 results with significant growth compared to FY 2023. Q1 PAT of RM22.005 mil is 36.3% of FY 2023 Core PAT of RM60.546 per the excel worksheet attached.

• Securing a lucrative contract from Philippine Amusement and Gaming Corporation ("PAGCOR") for the supply and delivery of Slot Machine Equipment, valued at RM381 million.

• The anticipated positive contribution to earnings and net assets per share from the PAGCOR contract in FY 2024 commencing from Q3.

• At conservative net margin after tax of about 10% (we understand from investor briefing net margin range from 9% to 12% depending on order quantity), we estimated the impact after tax of the contract could be about RM38 million net profit given the Macau tax rate is 12%.

• Favourable industry dynamics driven by the resurgence of the gaming sector post-pandemic and increased demand for gaming facilities.

Strong Financial
• The Company has a cash balance of RM185.5 mil (including other investments) with no bank borrowing on 31 March 2024.

• The cash per share is about 12.04 Sen compared to the net asset of the Company of 17 Sen. The Company has been in net cash position since 2015.

• Strong business cashflow with cash generated from operation for Q1 amounted to RM24.4 mil and for FY 2023 the cash generated from operation was RM123.81 mil.

The booming tourism industry and arrival of tourists is driving up the business of gaming resorts and gaming outlets operators. We understand the gaming industry is back to pre-pandemic level and all operators are operating at optimum capacity and looking at expanding their facilities and upgrading to newer EGM (electronic gaming machine). This demand augurs well for RGB.

The Company business in Philippines (its major market) is going to benefit from new casinos scheduled to open in the next few years as well as from the privatization of 41 casinos by the Philippines Gaming Regulator (PAGCOR). Do take note that on 30 May 2024 the Company had announced its subsidiary in Macau had secured a RM381 mil new order of gaming machines from a new Casino in Philippines for deliveries in FY 2024. RGB International Bhd (“RGB”), a leading casino machine supplier has been in the gaming industry for over 30 years. As international border is now reopened, and casino licenses have been rolling out extensively to boost economy, we believe RGB is poised for a growth in FY2023 and onwards.

Investment Merits
• Group successfully secured a RM381 million contract for a new casino in Philippines to be delivered in FY 2024 which will bolster its profit.

• Exclusive distributor for two main slot machines suppliers (Light & Wonder and Aristocrat) in the Philippines where the company hopes to benefit from the casinos scheduled to open in the next few years as well as from the privatization of 41 casinos by the Philippines gaming regulator (PAGCOR).

• Increasing Gross Profit margin to about 19.4%.

• Strong Balance Sheet with Net Asset per share of 17 Sen

• Cash balance of RM185.5 mil and cash per share of 12.04 Sen per share

• Gearing: Nil

• Net positive operating Cashflow of RM24.4 mil for 3 mths FY 2024 (RM123.8 mil FY 2023)

Conclusion

A share worth to buy in on weakness @42.5 Sen with huge potential upside of 41% to 69% with a valuation of 60.0 Sen to 72.0 Sen using PE 10 to PE 12.

Share Price RM0.425
Market Capital (RM): 658.0 million
Number of Share: 1.541 billion
EPS: 3.11 Sen (4 rolling qtrs.)
Estimated FY 2024 EPS: 6.0 Sen
P/E Ratio using FY 2024 Estimated EPS: 7.08
ROE (%): 18.29%
NTA/share: RM 0.17
Share Price range (1 Year): 25.5 Sen to 46 Sen


RGB Business

RGB is a leading supplier of gaming products in Asia with over 35 years of experience in the gaming supply industry. RGB International Bhd. (“RGB” or “the Company”) was incorporated in Malaysia on 16 January 2003. RGB is an investment holding company with its subsidiaries primarily involved in: • sales and marketing, and manufacturing of EGM and equipment (“SSM”) • machine concession, technical support and management (“TSM”) • on-site technical solution, preventive maintenance and repair services for EGM and equipment (“Engineering Services”)

RGB has 3 main business segments:

1. SSM Division
The SSM division comprises the sales of EGM, casino equipment and all kinds of gaming-related parts and components. We market our proprietary products and are also the authorised distributor of gaming products for many world-renowned brands in the industry. Our clients encompass a broad spectrum ranging from major casinos in the world’s gaming industry to operators of VIP slot clubs in many Asian countries, they are well supported by our dedicated sales team who provide clients with unparalleled round the clock service.


2. TSM Division
The TSM division provides machine concession programmes to operators throughout Asia, as well as technical, management, marketing and advisory services to our customers. We have partnered with licensed operators throughout Asia, with approximately 5,000 machines stationed across 46 outlets. The revenue derived is on a profit-sharing basis with the operators of the gaming establishments.



3. Engineering Services Division

The Engineering Services division offers end-to-end support and continuous maintenance to ensure the optimal operations of both the SSM and TSM divisions. Our team of expertly trained engineers, backed by renowned gaming product manufacturers, is dedicated to providing our customers with the best possible customer support experience to meet their unique requirements. We strive to be a one-stop-shop for all customer needs, offering an efficient and comprehensive solution to any problems they may encounter. Our Engineering Services division also provides a comprehensive suite of services to support the gaming industry, including product installation, machine relocation and game conversion, gaming table equipment and utility support, product and scenario-based training solutions, EGM technical and casino management system (“CMS”) requirements consultancy for new and existing operations, EGM preventive maintenance programs, and CMS turnkey solutions. Additionally, we offer a range of gaming parts and repair services.

Our Engineering Services division supports both the SSM and TSM divisions by providing end-to-end services and continuous maintenance to ensure optimum operations. We aim to enhance our support services by understanding our customers' requirements. Furthermore, our team consists of engineers who are expertly trained by renowned gaming product manufacturers to provide the best technical support experience to our customers.

Disclaimer

This publication is not a buy or sell call for the company, and its contents should not be considered as professional financial investment advice or buy/sell recommendations. This publication (analysis) has been prepared for general guidance and discussion purposes only and does not constitute professional advice or legal opinion. The information contained in this publication (analysis) should not be the sole basis for any decision regarding a particular course of action. Specific professional advice should be obtained before acting upon the information contained in this publication.

The above analysis is prepared by the author free of charge solely for educational purposes and discussion within the group, with consent from the author, and shall not be considered as investment advice or a recommendation to sell and/or buy the shares mentioned in this analysis. The views are based on the author's assumptions and estimations as of this date and are subject to change for educational and informational purposes. Please consult your licensed adviser for any investment decisions.

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