• We remain positive on MyEG despite concerns over plans to break up monopolistic business as we believe its strong presence in the market would prove to be a huge challenge for new entrants.

• We expect earnings to remain resilient at a 3-year CAGR of 31% over FY17-FY21F underpinned by strength of its non-concession businesses (represents c.80% of revenue). This is based on our assumption that MyEG to continue deliver e-government services but at lower fee due to emergence of new entrants.

• Maintain BUY at a TP of RM2.60, (WACC: 8.6%, terminal growth rate: 1%). We believe this is justified given MyEG’s proven track record and established IT infrastructure that could stave off competition.

MyEG – an established player

We remain positive on MyEG, despite concerns over plans to break up monopolistic business, owing to its strong branding and established IT infrastructure. We do expect some of its existing concession to be re tendered for new entrants but we believe this risk has been more than priced-in as its presence in the market would prove to be a huge challenge for new entrants as MyEG already set a high benchmark.

Non-concession businesses to expand more

We believe the non-concession businesses (represents c.80% of revenue) will provide earnings visibility to MyEG. We expect earnings to grow at a 3-year CAGR of 31% over FY17-FY21F by providing MyEG to continue deliver e-government services but at lower cost due to emergence of new entrants. We also note of a higher possibility for MyEG to win the bid for SST monitoring system as the GST monitoring system was initially designed for SST.

Looking into earnings visibility regionally

We see MyEG’s JV to market financial products for CIMB Bank Philippines Inc. (CIMBPH) as a good platform to tap further into the Philippines market as we believe MyEG would be able to offer more services to CIMBPH in the future. Additionally, Bangladesh also would be the next country that MyEG is planning to expand its expertise in delivering e-government services. This plan is still in the midst of negotiations.

Maintain BUY at a RM2.60 TP

We reiterate our BUY recommendation on the stock at a DCF-derived TP of RM2.60 (WACC: 8.6%, terminal growth rate: 1%) which implies FY18F PE of 34x before easing to 26x for FY19F. We believe this is justified given MyEG’s non-concession business which is to continue to grow owing to its proven track record and established IT infrastructure that could stave off competition.

Outlook remains positive

We remain positive on MyEG despite concerns over plans to break up its monopolistic business. Although we do expect some of its existing concessions to be re-tendered for better transparency, hence inviting new entrants into the fray, we strongly believe this risk has been more than priced-in. Additionally, it has strong presence in the market and proven track record which would prove to be a huge challenge for new entrants.

We think the collapse in share price to just about RM1.00 currently from the record high in March, RM2.90 is overdone as this would mean that MyEG would likely lose a big chunk of its non-concession business as well. Besides, the market also reacted negatively following GE14, due to MyEG’s board of directors whom are close to the previous government. Consequently, there were concerns that MyEG would see termination of its contracts. Since the past two weeks sentiment on the stock has improved and we expect risk of MyEG losing a sizeable market share to gradually diminish moving forward.

We would like to emphasize that since MyEG’s appointment for e-government services, the company has been able to deliver quality services by capitalizing on its expertise and has since become the top choice for many Malaysians in dealing with government agency.

Our positive view is further elaborated below:

• MyEG – an established player. With the government’s plan to break up monopolistic businesses, we remain positive on MyEG owing to its strong branding and established IT infrastructure which should provide MyEG an edge in securing more government projects in future. We expect this would also be a huge challenge for new entrants as MyEG already set a high benchmark.

• Non-concession businesses to continue growing. Currently, MyEG’s non-concession business ie. auto insurance, MyMotor, foreign worker insurance, hostel accommodation and job matching & placement in FY17 stands at 80% of total revenue as compared in FY12 at only 42% (Chart 1). During the last 5 years, MyEG has expanded its non-concession businesses by capitalizing its dominance in delivering egovernment services.

We expect earnings to grow at a CAGR of 31% over FY17-21F based on our assumption that MyEG will continue deliver e-government services but at a lower rate and emergence of new entrants. This translates to intrinsic value of RM2.60 per share, based on our estimate. The strong growth in MyEG’s earnings is backed by continuous growth of its non-concession businesses especially under foreign worker segment and auto insurance. However, if we assumed MyEG to forgo the e-government services or deliver the services for free of charge since its non-concession businesses have been able to generate 80% revenue from the 20% concession business, we expect earnings to grow at a slower pace of 21% over FY18-FY21F. This assumption reduces MyEG’s intrinsic value to RM2.30 per share.

• Expanding its services regionally. Currently, MyEG is looking to expand its business and expertise in providing e-government services in the Philippines and Bangladesh. We believe the joint ventures between these countries will provide an entry point and market visibility for MyEG to expand its business regionally by capitalizing on the egovernment services there. Recently, I-Pay MYEG Philippines Inc (IPMPI) had signed a memorandum of approval (MoA) with CIMB Bank Philippines Inc (CIMBPH) whereby IPMPI will market financial products from CIMBPH. We see this as a good platform for MyEG to tap into the Philippines market as we believe MyEG would be able to offer more services to CIMBPH to meet their needs.

• SST monitoring to replace GST monitoring system. To recap, since 2017 c.500 GST monitoring devices have been installed throughout Klang Valley. However, the current government has announced that GST would be zero-rated and will be replaced by SST. We understand from management these devices could be converted to monitor SST collection, as initially the GST monitoring device was actually designed for SST monitoring but was then changed to facilitate for GST. Since the tax monitoring system and devices are already in place, this is an advantage for MyEG as we expect higher chance for MyEG to be successful in an open tender. We believe this is crucial for current government to implement and collect the SST revenue as soon as possible to minimize the tax evasion resulted from the abolishment of GST. We see the SST monitoring system would be a strategic advantage for MyEG to diversify into the retail space ie. e-wallet, point of sales (POS) system, accounting system and business permit renewals which would give additional earnings visibility to the company.

Maintain BUY at TP of RM2.60

We maintain our BUY call on the stock with a target price (TP) of RM2.60. We expect earnings to grow at a 3-year CAGR of 31% over FY17-20F. Our TP is based on DCF method that assumes WACC of 8.6% and terminal growth rate of 1% (Table 1).

Underpinning our TP and earnings forecast are as follows:

• No more extension of FWRP (previously we expect another 2m of foreign workers to be registered under rehiring program).

• No contribution from GST monitoring system

• Foreign worker renewal permit to continue but we expect lower number of renewal annually to 1m from 2m as we saw the government is serious to reduce the number of foreign workers in Malaysia

• Fee reduction for foreign worker renewal permit services to RM20 from RM35 per renewal.

• Lower contribution for e-government and non-government related services ahead of possible re-tendering of some of the concessions to allow entrant of new players as MyEG. By taking our assumption that MyEG to forgo the e-government services or to deliver the services services at a free of charge, we expect earnings to grow from non-concession businesses at a 3-year CAGR of 21% over FY18-21F which translates its intrinsic value of RM2.30. Underpinning our assumptions are as follows:

• Auto insurance to continue. We expect approximately 2m private vehicles to continue using MyEG’s platform.

• MyEG to continue deliver foreign worker-related program such as foreign worker insurance, job matching & placement and hostel accommodation.

Source: BIMB Securities Research - 25 Jul 2018