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Tuesday, November 01, 2016

RGB: Possible Bullish Breakout

Background

RGB International Bhd (“RGB”) is involved in the sale of electronic gaming machines and leasing of gaming machine concessions in gaming clubs where it receives a sharing of revenue generated.

Prior to 2009, RGB (then, known as Dreamgate) used to own and operate a casino with more than 3,000 machines in Cambodia. It ran into operational difficulties in 2009 when the Cambodian government imposed a ban on sports betting and electronic gaming machines in slot clubs in Phnom Penh and Siem Reap. It took the group about 3 years to execute its turnaround strategy to re-deploy its idle machines to other markets in ASEAN. In 2012, RGB returned to profitability.

RGB is well-positioned to benefit from the increasing liberalization of casinos and gaming clubs in emerging Asian countries, such as the Philippines, Cambodia, Laos, Nepal and Timor Leste. In 2015, RGB had operations in 37 outlets with 6,400 machines, mainly in Cambodia and the Philippines.

Historical Financial Performance 

As noted earlier, RGB's financial performance took a hit in 2009-2011. Its return to the black took place after the re-deployment of its 3000 machines from Cambodia to other regional markets.

Graph 1: RGB's last 12 years P&L

The segmental result for the 3 main divisions clearly shows the changing contribution to the group’s bottom-line. The casino operation (classified under Leisure & Management) was a wash-out in the early years. It was completely phased out by 2011. From then on, the group’s main earning drivers are the selling of gaming machines (classified under Sales & Marketing) and lease/revenue-sharing of gaming machines (classified under Technical Support & Management). In the last 2 years, the contribution from Technical Support & Management division has exceeded the contribution from the Sales & Marketing division.
 
Graph 2: RGB's last 13  half-yearly P&L 

Recent Financial Performance

RGB's recent quarterly result shows a gradual but steady improvement in both top-line and bottom-line. In the last 2 years, the group's best result has been recorded in the quarter ending June 30.

Table: RGB's last 8 quarters P&L


  
Graph 3: RGB's last 12 quarters P&L 

Improved Financial Position

As at 30/6//2016, RGB's financial position is deemed healthy, with current ratio at 2.12x and gearing ratio at 0.78x. 

Graph 4: RGB's current & gearing ratio over the past 12 years

Valuation

RGB (closed at RM0.22 yesterday) is trading at a trailing PER of 12.6x (based on last 4 quarters’ EPS of 1.74 sen). However, the company has cash of RM70 million as at 30/6/2016 (or 5.3 sen per share). If the cash is deducted from the share price, RGB’s trailing PER is only 10x.

The two gaming stocks listed on Bursa - GenM and Genting – are currently trading at trailing PER of 21x and 26x respectively. One can make a case that RGB should trade at similar PER as GenM or Genting. Assuming that RGB can command a PER of 20x, then its fair value would be RM0.35 (even ignoring the cash in hand of 5.3 sen per share).

Technical Outlook

1. Long-term Potential
The chart below shows RGB breaking above the horizontal line at RM0.20. Its next resistance is at RM0.35. If the current rally can touch the horizontal line at RM0.35, RGB would give us an upside of 75%.

Chart 1: RGB's monthly chart as at Oct 31, 2016 (Source: Chartnexus)

2. Short-term Risk
The stock has risen quite substantially from RM0.17 to RM0.22 in the past 6 weeks. It has surpassed the line, XY at RM0.215. Failure to stay above this breakout level could lead to a correction to the horizontal-cum-psychological line of RM0.20.Below this level, the next support would be the line, BC at RM0.175.

Chart 2: RGB's weekly chart as at Oct 31, 2016 (Source: Chartnexus) 

Recommendation

Based on good financial performance & position, attractive valuation & positive long-term technical outlook, RGB is deemed a good stock for long-term investment. If you choose to take a position in this stock, you should do so gradually, taking into account the risk of a pullback in share price after its recent rally and the possibility of weaker result for the next 2-3 quarters.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

3 comments:

Sathya said...

What about UNISEM that recommend to buy althought kenanga rated underperform

Sathya said...

I bought unisem after buy call from you
Price drop so much after the quarterly result is out.is it advise able to hold?

Alex Lu said...

Hi Sathya,

Unisem's earning has flattened out. It looks like peak earning in the past, like 2008 & 2010. Further decline could tip the scale and the selling will pick up pace.

Technically speaking, Unisem is still hanging onto its uptrend line that stretches back to early 2014. Signs of weakness are present; MACD crossed below MACD signal line & ADX has dropped below the 20 mark (loss of uptrend momentum). A break below RM2.30-2.35 could signal the end of uptrend and the beginning of the downtrend.

I would recommend TAKE PROFIT or REDUCE on Unisem.