CREADOR has made a costly return to GHL Systems Bhd as a substantial shareholder, after exiting the company more than three years ago. The private equity (PE) company has a 12% stake in GHL today, but had to fork out about 70% more than its exit price in 2017.

Why the re-entry and what does it see in GHL?

“We have invested RM170 million to acquire shares in GHL. This is a re-investment. We were investors from 2014 to 2017. What we see is the electronic payments industry continuing to explode since our exit and we want to be a part of this continued shift to digital from cash,” says Creador founder and CEO Brahmal Vasudevan. “GHL has the widest network of payments acceptance. It is the largest payments company in Southeast Asia. We believe there are still growth opportunities for this company.”

Brahmal says Creador did not buy GHL shares “cheap”. “We paid an average of RM1.70 per share for our current shareholding in GHL today.”

In March 2017, Creador exited GHL when it sold its 28.3% stake to Actis Capital, which emerged as the new major shareholder of GHL following its acquisition of a 44.4% stake in the payments service provider. It is still a substantial shareholder today.

At the time, Actis acquired the stakes at RM1 per share, a 16% discount to GHL’s closing price of RM1.19 then.

Since Creador’s exit at end-March 2017, GHL’s market capitalisation has expanded 74% to RM1.24 billion today.

For the year ended Dec 31, 2019 (FY2019), group revenue rose 16.3% year on year while earnings before interest, tax, depreciation and amortisation expanded 27.6%. Profit improved 17% to RM28.7 million from 2018.

New merchant touchpoints grew 10% to 397,500, and the group processed a transaction payment value (TPV) of RM13.9 billion in payment transactions, which is a 39% growth y-o-y.

During the period, the group invested about RM11.9 million in growing its merchant touchpoints across all of its Asean markets — Malaysia, the Philippines, Thailand, Cambodia and Indonesia.

In its FY2019 results announcement to Bursa Malaysia on Feb 25, GHL says it is “continuously assessing the impact” of the Covid-19 situation and putting in place the required business continuity processes to ensure its operations are not impacted. “Our company strategy remains the same and we believe the continuous growth of cashless payment adoption will continue to drive the growth of the company.”

While CGS-CIMB Research projects a stronger net profit in FY2020F, driven by higher transaction payment acquisition (TPA) contribution for GHL, it does see risk from a prolonged Covid-19 pandemic affecting GHL’s total processing value growth in FY2020F as it estimates that the group processed about RM100 million worth of total processing value per month for Alipay’s e-wallet in 4Q2019.

“Maintain ‘hold’ with a higher target price of RM1.67, still based on 25 times CY2021F price-earnings ratio (a 10% discount to the global sector mean of 28 times). Our 25 times PER multiple also implies a 10% discount to GHL’s eight-year historical mean of 27.5 times. Higher TPA margins and stronger contribution from overseas operations are key upside risks to our call. Declining merchant discount rates, weaker total processing value and delays in growing its merchant base are key downside risks to our call,” it says in its Feb 25 report on the counter.

In a Feb 26 report, RHB Research says GHL’s FY2019 results came in above expectations on stronger-than-expected revenue contribution from the shared services and TPA segments. This prompted RHB Research to increase its earnings forecasts by 8.2% and increase its target price for the stock to RM1.86 from RM1.77.

According to Bloomberg, GHL’s 52-week price range is RM1.04 to RM1.72.

What else is on Creador’s radar screen

Asked to comment on what else Creador is looking at in the current uncertain environment, Brahmal replies that the company is “studying the market”.

“Across the board, mid-caps have been demolished. We do occasional public investments but not a lot. If I were a fund that invests mainly in listed securities, I would look at the banks ... they are trading at attractive valuations today. Additionally, many blue-chip stocks are attractive. There was a time when YTL Power International Bhd was down to 50 sen per share at a yield of 10% — now is a great time to be looking at such stocks.”

Brahmal observes that liquidity remains “very thin” although prices on the local bourse are down. “If an investor buys just a little bit, prices can increase by 20% depending on the stock … this is due to thin liquidity.”

On potential private investments, Brahmal says the PE firm is looking at an IT services company and a chain of cinemas in India.