GHL System Berhad Annual Report 2017

GHL SYSTEMS BERHAD 20 3. PERFORMANCE BY BUSINESS SEGMENT AND GEOGRAPHY (cont’d) 3.2 Performance by Geography (cont’d) 2017 Group turnover grew +3.2% yoy to RM253.7 million (2016 – RM245.9m). Pre-tax profits was up +2.4% yoy to RM25.4 million compared to RM24.8 million a year ago and pre-tax margins were stable at 10.0%. Malaysian operations contributed 83.2% (2016 – 85.6%) of group turnover and the decrease in weighting was due to a better performance from both Thailand and Philippines. EBITDA margins was 15.6% for 2017, a decline from 16.3% in 2016. Philippines’ turnover grew +9.8% yoy at RM29.0m (2016 – RM26.4m) with EBITDA margins up at 37.9% from 32.7% over the corresponding period last year. Solutions Services registered yoy decline but Shared Services and TPA saw growth driven by higher rental fees and transaction fees collected. Thailand recorded a growth in topline revenue of +56.8% to RM12.7m (2016 – RM8.1m) driven by its TPA segment which saw strong growth in MDR transaction fee collected. Higher rental revenue from its Shared Services segment and contribution from hardware sales from a network project drove growth at its Solutions Services segment. EBITDA remain positive at RM3.4m compared to RM2.2m in 2016 with EBITDA margins remaining stable at 26.6% vs 27.3% in 2016. Australia remains the smallest contributor to group operations at RM938,000 compared to 2016 YTD turnover of RM1,001,000. Both years saw positive EBITDA contribution of RM97,000 and RM312,000 for 2017 and 2016 respectively. 4. KNOWN RISKS In the ordinary course of its operations, the Group is exposed to (a) Merchant performance risk (b) Liquidity risk, (c) Interest rate risk and (d) Foreign currency risk. a) Merchant performance risk – The TPA business entails the Group contracting directly with merchants for the provision of electronic payment services based on underlying, back-to-back agreements with acquiring Banks. A risk arises in that should the merchant default in his obligations to the cardholder for any particular sale, then, that sale would be reversed (“or charged-back”) and the sale amount refunded to the cardholder. The acquiring Bank would then recover the charged-back transaction from the Group which would then seek to recover it from the merchant. The Group could potentially incur a loss if the merchant was no longer in business or otherwise unable to reimburse the Group for the charge-back. The Group has, over the last 3 years, invested significantly to develop risk management policies, systems and hire risk managers with the requisite experience to monitor merchant performance risk. The Group also obtains deposit and other forms of collateral from merchants to cover performance risk. These controls have effectively mitigated merchant performance risk and as of the date of this report there was negligible exposure arising from this risk. Group losses attributable to merchant performance risk in 2017 amounted to less than RM63,000. b) Liquidity risk – As indicated in Section 2.6, the Group is in a net cash surplus position and therefore has no net gearing. This is primarily due to the intake of security deposits from merchants when deploying EDC terminals and exacting prepayments from merchants when they purchase Telco top-ups for onward sale to consumers. Short term purchases for Telco prepaid top-ups are typically funded with internal cash or Bankers Acceptances and are liquidated when these are on-sold to merchants. Longer term EDC terminal purchases are funded with bank term loans that match the life of the EDC terminals. The Group plans to fund the planned expansion in the TPA business by commensurately increasing its bank term loans. Given the Group’s strong cash flow and lack of net gearing, it is well positioned to do so. c) Interest rate risk – As indicated above, short term assets in the form of prepaid Telco top-ups are self- liquidating and typically funded with Bankers’ Acceptances. There is therefore minimal interest rate exposure as the tenors are matched and are short term (typically, 30 days or less). Long term assets are funded with term structure debt that bears a fixed rate of interest. These lending structures minimise the Group’s exposure to interest rate risk. MANAGEMENT DISCUSSION AND ANALYSIS CONT’D