RGB ... Turning Around But Gearing Still High

Sources say it will start supplying gaming machines to a casino operator in North Asian country in 2015 with the business expected to bring in additional earnings of about rm345000 per annum over a three year period.

The new contract will add to the immediate momentum seeing that RGB has already posted much stronger results in the nine months ended Sept 30 2014. During that period, its net profit jumped 200% to rm15.53 million from rm5.22 million previously, while revenue was up 50% to rm159 million.

The strong performance was due to the increase in the number of machines sold to new and existing casinos in the region.

RGB has entered into a fixed fee machine leasing agreement with a licensed operator and will deliver the machines by the first quarter of 2015. This refers to the contract that is expected to bring in USD300000 over a period of three years.

If its stellar results for the first nine months of 2014 could sustain or grow, the stock could deemed attractive …

Its EV is at roughly at rm171 million (market value of rm159 million plus net borrowings of rm11.8 million) while its nine month Ebitda as at Sept 30 2014 stood at rm42.65 million, This puts its EV/Ebitda at about four times, which could be lower when the full year Ebitda is taken into account.

An EV/Ebitda of four times means the annual operating cash flow is strong enough to buy out the entire company and pay off its net borrowings in just four years assuming that the cash flow is constant. The method is usually used to value strong cash flow generating businesses.

Nevertheless, its low EV/Ebitda is due to its small size … Unlike established casino operators whose cash flows are among predictable it is a small sized equipment supplier that is subject to higher volatility in its business, hence the greater uncertainty in cash flow, as shown by its ups and downs over the past few years.

It sells, markets and manufactures electronic gaming machines and equipment. It also has machine concession programmes and provides technical support management for its clients.

Beyond the turnaround, RGB is having moderate sustainable growth. It also seems to continue its expansion in the Phillipines via two ways – via expanding the traditional slow machines base and launching the new Bingo game which is popular in that market.

It is trading at a discount which is expected because it is not big in size and is not a casino operator.

It had one time dragged it into massive losses in Cambodia due to the changing in the government policies.

The tide of changed for RGB in 2012 when it returned to the black, registering a net profit of rm6.03 million following efforts to improve yields and cost management. It also started diversifying into other markets and depended less on Cambodia.

For FY2013 it recorded a slight drop in net profit to rm5.97 million from rm6.03 million at year earlier and improved its net gearing ratio to 0.53 times from 0.94 times in 2012.

At present, the company operates mainly in Malaysia, Cambodia, the Philippines and Laos. It excited Macau in 2014. It also ventured into Timor Leste via the acquisition of a 30% stake in Timor Holding Lda for rm680000. THL primarily operates amusement and electronic gaming machines.