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$RGB / 0037 (RGB INTERNATIONAL BHD)

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❗ 🎰 *RGB International (RGB MK): Initiate BUY; TP: RM0.71* ❗
Main Market; Market cap: RM619m


🔹 RGB is the leading distributor of Aristocrat, Light & Wonder, and Konami’s electronic gaming machines (EGM), holding a dominant 70-80% market share across Asian casinos

🔹 We like RGB for its exciting growth prospects, backed by 1) being a prime beneficiary of regulatory changes in the Philippines and Cambodia, 2) significant opportunities in new markets such as Sri Lanka, Thailand, UAE, and Japan, 3) strong recurring income prospect from its potential new online casino venture with PAGCOR, and 4) growing EGM installed base that is poised to drive higher annual replacement base

🔹We expect a blockbuster year for RGB, forecasting a 32% profit CAGR over 2023–26E. RGB is in a prime position to capture 60–70% of new EGM orders from its largest market, the Philippines, driven by 1) a robust pipeline of new integrated resorts set to open, 2) ongoing upgrades following the privatization of PAGCOR’s casino operations, and 3) growing global replacement market

🔹 The total addressable market for EGMs is projected to expand by c.17k over 2024–27E. This growth builds on the existing 44k EGMs currently in operation, reflecting the significant potential opportunities for order replenishment. These dynamics provide strong visibility for our RGB’s projected sales of 4.5k–5.5k units across 2024–26E

🔹 RGB aspires to be the leading one-stop solution for casinos, offering a wide array of products and services—from signage to advanced casino surveillance systems. Leveraging its in-house manufacturing facility in Penang, RGB produces high-quality LED signage as a more cost-efficient alternative to competitors. Taking innovation a step further, RGB has established a dedicated team to drive AI solutions, beginning with an AI-driven surveillance solution in collaboration with a leading China-based company, providing cutting-edge security surveillance solutions

🎯 Initiate coverage on RGB with BUY and target price of RM0.71, based on 9x PE 2025E EPS. This represents -0.5SD below FTSE Bursa Malaysia Small Cap Index (FBMSC)’s 10-year mean and c.59% discount to the global EGM manufacturers. Our steep target PER discount takes into account 1) RGB’s role as a distributor rather than manufacturer and its dependence on suppliers, 2) its smaller market capitalization relative to peers, 3) its small replacement base of 2,500 machines per annum, and as such 4) more significant exposure to sales volatility

💎 At 5.1x 2025E PE (or 2.9x 2025 ex-cash PE) – assuming a net cash position of c.RM260m in 2025E), the stock trades significantly below our ascribed valuation, with a 10% dividend yield, making it an attractive dividend yield play. While we acknowledge that the current valuation reflects the risks associated with RGB's business model and market conditions, its current pricing and strong dividend yield offer a compelling opportunity, especially if its geographic expansion proves successful