While MYEG remains relevant as an indispensable enabler of e-government services that cuts down red tape and corruption, it requires government resolution to commence various earnings-accretive catalysts. We downgrade the stock to HOLD as share price rallied 47% in the past month and increase our target price to RM1.27 as we roll forward our valuation to 2019. Entry price: RM1.14.

WHAT’S NEW

• Slight delay in pilot phase of e-bidding services for vehicle plates; actual e-bidding service still targeted for Jan 19. While the pilot stage of e-bidding services for vehicle plates which was supposed to commence on 1 August was delayed, the actual roll-out of the service is still targeted for Jan 19. Understandably, the pilot project will require My E.G. Services’ (MYEG) back-end operating system, hence increasing the possibility of MYEG becoming a beneficiary of e-bidding services when the Ministry of Transportation (MOT) announces the project winner later this year. Recall that the newly-formed MOT repealed the practice of allowing certain non-government organisations to sell special vehicle number plates, and announced the roll-out an electronic bidding system from Jan 19. We remain convicted that MYEG stands to be a key beneficiary of e-bidding.
• Remittance services finally seeing the light at the end of the tunnel. After the long drawn-out talks with regulators and foreign currency licensees, we understand that MYEG is ready to roll out remittance services for foreign workers by 3Q18. The group will be able to rake in an undisclosed amount of transaction fees and forex spreads when the venture takes off. This business has huge potential given that the annual remittances outflows are worth about RM36b.
• Worker matching and accommodation momentum dampened by slowdown of foreign worker intake. The new government has embarked on various clean-up processes to ensure efficiency and effectiveness that inadvertently slowed down the entry of foreign workers into Malaysia. The Ministry of Human Resources has proposed to revert the current system of hiring foreign workers to the government-to-government approach without any middlemen, such as private company Bestinet which has received bad press of late (allegations that it has profited too much on its monopoly). This new process in theory enhances the need for an efficient online system like MYEG’s, but meanwhile, has disrupted MYEG’s worker matching and accommodation businesses.

STOCK IMPACT

• Procurement of e-bidding of vehicle plates allows for more customer acquisitions in the road transportation space. Based on our channel checks, there are currently 1m-1.5m vehicle number plates registered p.a. and MYEG should be able to clinch revenue of RM2 per transaction (similar fees to other current online services) under the e-bidding service for vehicle plates. Assuming a 50% PBT margin, the new project would be able to rake in a PBT of RM1m-1.5m. On the same note, the e-bidding service for vehicle plates would also promote customer acquisition that would eventually benefit MYEG’s commercial services such as insurance, car financing and vehicle sales under MyMotor which has transactions of below 1,000 units per month.
• New policies have temporarily put the matching programme and accommodation services on hold but opens up project opportunities. We note that the freeze of foreign worker intake a couple of months ago has impacted the matching programme which has approximately 4,000-5,000 matching transactions per month. Besides, the new government policies have also resulted in a halt in the provision of foreign worker accommodation services. Nevertheless, management alluded that the freezing of foreign worker intake is temporary given the shortage of labour in Malaysia. MYEG’s role should continue to be relevant to the government given that it can provide e-processing services with minimal fees as opposed to the sky-high fees charged by middlemen currently, hence providing new foreign worker-related project opportunities.
• Foreign ventures could replicate local success. With MYEG’s foreign venture currently being present only in the Philippines via I-Pay MYEG Philippines (IPMP), management intends to replicate its success in e-government services in other countries with a population of more than 100m, with namely Indonesia and Bangladesh in the pipeline. While IPMP is expecting to breakeven in FY18, future earnings potential could be huge given the size of the potential transactions. Note that IPMP has introduced a number of e-government services namely: a) electronic payment gateway services for Quezon in relation to the collection of taxes and other services, b) certification of good conduct by the National Bureau of Investigation (NBI), c) certification for overseas workers, d) cryptocurrency payment gateway services, and e) various upselling commercial services relating to insurance and personal loans. As of now, only the certification of good conduct by NBI is being rolled out with 20,000 certificates issued daily and at a fee of RM2 equivalent per transaction.
• Impact of SST on its tax monitoring system. While MYEG’s GST monitoring system was scrapped, we believe the existing infrastructure could be recalibrated for SST in future, as the tax monitoring system was initially designed to track SST collection and essentially aims to curb tax evasion. Should MYEG’s tax monitoring system turns obsolete, the company would take on an impairment of approximately RM150m for the amount it has invested in the system. Note that MYEG has changed its FYE to September from June and the potential impairment of the tax monitoring system would be booked either in 4QFY18 or 5QFY18 if there is no resolution made by the government.

EARNINGS REVISION/RISK

• No change to our earnings estimates at this juncture, but protracted freezing or G2G holdups on allowing migrant workers to Malaysia will significantly affect growth prospects.

VALUATION/RECOMMENDATION

• Downgrade to HOLD with a higher target price of RM1.27 (previously RM1.06), following a 47% share price rally in the past month and the lack of any immediate catalysts. Our higher target price is due to the roll-over of valuation to 2019 from FY19, based on 12.7x 2019F PE, implying -1.3SD which is below its historical mean PE amid current market uncertainty.

SHARE PRICE CATALYST

• Government resolution to renew MYEG’s e-government concession which is expected to expire in 2020.
• Resumption of share-buyback in November as MYEG has currently reached the creeping rule of 2% over a period of six months.

Source: UOB Kay Hian Research - 3 Aug 2018