Monday 25 November 2013

Cuscapi: It's Do Or Die With REV

Cuscapi caught a lot of investors by surprise by plunging into red in its latest FY13Q3 financial results.

In FY13Q3, Cuscapi recorded a significant lower revenue of RM9.7mil (down 33% QoQ) and a net loss of RM2.8mil, resulting in a 9MFY13 cumulative loss of RM1.8mil.

This is Cuscapi's first quarterly loss since Q2FY09.

Cuscapi, previously known as Datascan was founded in 1978 and listed in Mesdaq in 2004. It was just transferred to main board in Sep 2013.

Cuscapi is one of the leading providers of IT solution in Malaysia, with core business in:
  • Hospitality, F&B and retail management solutions
  • Network security solutions
  • Collaborative Fulfilment Management solutions
  • Business consulting services

Cuscapi's major business comes from its business management solution by providing point-of-sales solutions to its customers. In 2003, it has developed its in-house F&B business management solutions software application known as Transight Smart Service Suite and was estimated to have a market share of 70-80% in 2008. 

Its customers include McD, KFC, Pizza Hut, Berjaya group, Shangri-La to name a few. It has its presence in 29 countries especially South East Asia and China. It has just acquired a company in Philippines in FY2012 and plans to set up more offices in China, Middle East and India.

Cuscapi's revenue has been in an uninterrupted increasing trend since 2008. However, its net profits fluctuate and is hard to predict. This might be due to spending in overseas expansion and R&D.

RM mil FY12 FY11 FY10 FY09 FY08
Revenue 58.9 53.6 43.9 38.9 36.3
PBT 6.8 8.8 10.0 0.5 1.1
PAT 6.8 8.6 9.1 0.3 1.0

For the last 3 consecutive quarters, Cuscapi's net profit is in a reducing trend. The reasons given by its management is the same for the last 3 quarters: delay in materialization of certain significant projects and increased operating expenses.

RM mil FY13Q3 FY13Q2 FY13Q1 FY12Q4
Revenue 9.7 14.4 11.8 14.2
PBT -2.6 0.4 0.6 1.7
PAT -2.8 0.4 0.6 1.6

Why so many delays?

Perhaps all the focus and resources have been shifted to something called "REV".

If you don't know anything about Cuscapi's business, I think it should be fine as you just need to know this "REV", as it represents Cuscapi's future. It will enable Cuscapi to break its bottleneck and jump immediately to a higher level if it is successful. 

Cuscapi has spent a lot of money and time in R&D to develop this innovative product called "REV", which is a Customer Self-Service Interactive Ordering Solution (CSOS). It is a complete hardware & software solution that enables restaurant diners to view electronic menus and submit orders via an Abdroid-based tablet.

Cuscapi does not sell the tablets. Customers will need to subscribe to REV for a 3-year contract if they are keen to use it after a trial. Thus, it will generate a long-term recurring revenue for Cuscapi.

Previously, Cuscapi sold the hardware to its customers and just received some service & maintenance fees thereafter.

The management will also look into additional revenue-sharing business model with its F&B customers through promotion offered through the REV. Any additional sales from the REV promotion will go straight into Cuscapi's profit by a certain ratio. Besides, advertising in the REV tablet can be done in the future to generate more revenue.

      REV tablet - made in China

I am not sure how much Cuscapi will get from each REV tablet subscribed. In CIMB report, it is mentioned that 10,000 subscription contributes RM24mil to the revenue. If this is true, then it should be RM2400 a year or RM200 a month for each tablet I presume.

CIMB predicts conservatively that Cuscapi may get 3,000 REV subscription in FY2014. This will give a revenue of RM7.2mil a year. This may not be too much compared to FY2012 revenue of RM59mil. 

However, I think its profit margin should be high and if Cuscapi successfully designed its REV for fast food restaurants, then its subscription may increase tremendously.

Cuscapi's CEO Mr Her has been quoted as estimating that the REV could lead to as much as RM25mil a month in revenue by 2015! This will be a whopping RM300mil revenue a year from REV alone!

This calculation is derived from charging RM8,000 per month per F&B outlet, with 40% of its 8,000 outlets adopting REV. Currently Cuscapi is managing 8,000 table service outlets. This does not include 12,000 outlets in quick serving restaurants (fast food).

If this is materialized, and we assume a conservative net profit margin of 10%, Cuscapi's net profit from REV by 2015 will be RM30mil. This would give an estimated EPS of 7sen (profit from REV alone, base on 433mil shares, excluding future warrant conversion), or fair value of at least 70sen if PE is 10x.

       One of Cuscapi's client

The REV was officially launched in September 2013 and so far Cuscapi has successfully secured 2 pilot restaurants in Malaysia as its customers. It is also deploying REV in other pilot sites in Asean & China region. 

China is a big opportunity for Cuscapi as one medium size chained restaurants can have 300-500 outlets. Base on previous records, I think Cuscapi may have a good chance in China, as it is currently experiencing encouraging growth in China.

Cuscapi experiences 22% growth in China revenue for the first 9 months of FY13 (RM9.4mil) compared to  the corresponding period in FY12 (RM7.7mil).

After announcing the disappointing result, Cuscapi's share price falls to 39sen on 22 Nov 2013. 

Cuscapi currently has RM30mil of cash mainly raised through the rights issue in April. This cash will be reserved for future merger & acquisition to increase its value. It paid 1.125sen net dividend (after tax) for FY2013, which is 3% yield at share price of 39sen.

It has just signed an agreement with Malaysia Debt Ventures Berhad in October for up to RM13mil to help to finance the deployment of REV. Before this, its borrowing is negligible. 

       CEO Her Chor Siong, since 2010

Since the REV is only at its infancy stage, a lot of more expenses may be needed and other businesses seem not going so well, I think I should continue to monitor Cuscapi in my stock alert list.

Those who has very high confidence in the REV may have an opportunity to accumulate Cuscapi's shares. It is potentially RM300mil per year revenue by 2015.

Anyway, Cuscapi is not the first to roll out this tablet-based ordering solution in Malaysia, the almost similar thing is available in Sakae Sushi since few years ago.

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