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 issuances under the proposed programme. 

The assigned rating incorporates Merchantrade’s established position in retail cross-border money transfers, as well as the expansion of its digital business that would support top-line growth. The rating also considers the competitive threats from mobile and digital platforms as well as regulatory risk. 

Merchantrade is the leading non-bank remittance provider in the country, with a track record spanning more than 17 years. Merchantrade’s shareholders include institutional shareholders Axiata Group, Kenanga Investment Bank Berhad (KIBB) and MCIS Insurance Berhad, reflecting its important presence in the money services business (MSB) industry. 

Merchantrade accounted for RM8.1 billion of the RM34.2 billion  local outbound remittance business in 2023. Merchantrade’s competitive position is supported by a large network of branches (94) and agent locations (477), particularly on the receiving end of its traditional cash-based remittance business. Migrant remittances to Bangladesh and Indonesia account for the bulk of Merchantrade’s money-transfer transactions by value, averaging 26% and 24% in 2019-2023. 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. 

The rating agency notes, however, that while Merchantrade remains the market leader in the non-bank remittance segment at 24% for the domestic market, its market share has trended down since 2022 amid rising competition, particularly from new money transfer technologies and technology-focused platforms with competitive pricing propositions such as Money Match and Wise. Nevertheless, alongside expansion of its traditional branch and agent network aimed at furthering its reach, 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. 

The company has over the past three years invested a substantial RM313 million in strengthening its technology infrastructure to keep pace with evolving competitive dynamics. Since the inception of its mobile wallet services in 2018, Merchantrade’s number of mobile wallet users has increased to more than 500,000 users, while its digital remittance transactions recorded a compound annual growth rate (CAGR) of 20% from 2019 to 2023. The company expects digital transactions to continue delivering strong growth moving forward. To this end, Merchantrade has outlined several strategies, including collaboration with banks, government agencies and large corporates, to tap into payroll accounts of migrant workers as well as collaboration with established players to issue co-brand and white label cards. Growth challenges will continue, thus the rating agency views positively Merchantrade’s ability to expand its digital business that will enhance its competitiveness to defend or grow market share, as well as provide margin expansion. 

MARC Ratings opines that technology risk is an increasingly important consideration for MSB providers like Merchantrade due to not only the competitive landscape but demand from stakeholders, including regulators, for efficient, reliable, and secure services. Increasing reliance on and rising volumes of digital transactions will make any technological failure disruptive, which can expose a player to reputational damage and financial strains. There are also compliance risks associated with regulations governing MSB, although the rating agency believes these are mitigated by controls that have been put in place and Merchantrade’s significant investment in employees with regulatory and compliance expertise. From staff cost of approximately RM66.4 million in 2020, this increased to RM86.5 million in 2023 and is anticipated to rise further as the business grows.     

Merchantrade’s remittance business operations typically involve pre-funding the company’s payout partners outside Malaysia ahead of customers’ remittance transactions (typically by one day), which creates foreign currency exposure in the ordinary course of its business. Merchantrade's pre-funding amount is based on remittance transaction forecasts and historical trends, covering up to one day of remittance transaction demand on normal weekdays and two to three days of remittance transaction demand on weekends or public holidays. The short tenure of the pre-funding coupled with the pre-funding amount based on estimated demand would naturally minimise the foreign currency exchange risk.

Revenue in 2023 improved by 31.1% y-o-y to RM273.4 million, primarily from growth in the MSB segment (2023: RM167.0 million; 2022: RM138.3 million). Accordingly, pre-tax profit improved to RM1.6 million after two years of losses in 2021/2022 largely due to the rapid build out of digital technology. Merchantrade projects further improvements in its revenue and profit in 2024. The rating considers Merchantrade’s improving financial profile and the rating agency’s expectations that its strengthened technology infrastructure and market position will drive positive revenue and profitability growth going forward. 

Borrowings stood at RM88.9 million as at end-2023, comprising RM74.4 million of overdraft, which is principally used to pre-fund the company’s payout partners ahead of customers’ remittance transactions (typically by one day). In regard to the payout partners, the rating agency believes counterparty risk is mitigated by a significant portion (89%) of the transaction value being exposed to bank partners in the respective recipient countries and by the continuous monitoring of payout partners conducted by the company. The proposed initial drawdown of RM50 million to RM70 million under the CP programme is for the purpose of pre-funding the payout partners to cater to business growth.

 

A sustained improvement in profitability, market share gains and a more diversified revenue base could lead to a positive rating action. 

Downward rating pressure may arise in the event of materially weaker profitability and credit metrics and/or significant compliance lapses.