MARC Ratings has assigned a preliminary rating of MARC-1 to Merchantrade Asia Sdn Bhd’s (Merchantrade) proposed Multi-Currency Commercial Papers (CP) Programme of up to RM200 million in nominal value. The rating is confined to ringgit-denominated issuance under the proposed programme, with the initial drawdown expected to be around RM50 million to RM70 million.
The rating incorporates Merchantrade’s established position in retail cross-border money transfers, the expansion of its digital business amid a competitive landscape that would support top-line growth and its strong institutional shareholders that have lent support to business growth. The rating also considers the high capital investment required in technology that has weighed on the company’s financial performance in recent years, the new money transfer technologies and technology-focused platforms that pose threats to the group, as well as regulatory risk.
Merchantrade has a leading position as a non-bank remittance provider domestically with a 24% share of the local outbound remittance business in 2023. The strong remittance business profile has been built on the back of a track record of more than 17 years. Its large network of 94 branches and 477 agent locations as at end-2023 — particularly on the receiving end of its traditional cash-based remittance business — represents a competitive advantage, which supports demand and mitigates competition risks. Merchantrade has also been actively utilising its resources to grow the company’s digital presence by expanding its services through mobile wallets and online channels.
Migrant remittances to Bangladesh and Indonesia account for the bulk of Merchantrade’s money-transfer transactions by value, averaging 26% and 24% between 2019 and 2023. In this regard, Merchantrade could be vulnerable to unfavourable political environments or legislation affecting migration flows, although the rating agency expects the market for remittance services to have strong near- to medium-term growth prospects, buoyed by an improving global economy and positive trends in labour migration.
MARC Ratings opines that technology risk is an increasingly important consideration for money services business (MSB) providers like Merchantrade, necessitated by not only the competitive landscape but demand from stakeholders, including regulators, for more efficient, reliable, and secure services. There are also compliance risks associated with regulations governing MSBs which have led to significant investments in employees with regulatory and compliance expertise. Exposure to foreign exchange related to pre-funding payout partners poses some risk, which is mitigated by the short duration of these arrangements.
Revenue stood at RM273.4 million in 2023, up 31.1% y-o-y, driven primarily by growth in the MSB segment. However, the company’s pre-tax profit was a modest RM1.6 million in 2023, although this reflected a turnaround from pre-tax losses in the two years prior, which had been caused by the increased operating cost for the rapid buildout of digital technology as well as headwinds due to the pandemic. The rating agency expects earnings growth to be on the uptrend on the back of continued strong growth from the company’s remittance services.
Borrowings stood at RM88.9 million as at end-2023, comprising RM74.4 million of overdraft that was principally used to pre-fund the company’s payout partners ahead of customers’ remittance transactions. Close to 90% of the transaction value to payout partners is exposed to banks in the respective recipient countries which mitigates counterparty risk. Proceeds from the CP programme will be primarily used for working capital.