• 1Q19 core earnings fell 0.7% despite higher revenue as gains were offset by higher net opex (+15.5%). Against our 2019F estimates, core earnings trailed ours but was broadly inline with consensus’ at 16% and 20% respectively.

• Qoq, core earnings fell 23% following the completion of foreign worker rehiring programme (FWRP) in 1Q2018 (FYE Dec).

• We cut 2019-21F core earnings by 31-37% as we take a more conservative view on the outlook of the foreign worker hostel and discontinuation of FWRP into 2019.

• BUY with lower RM1.70 DCF-derived TP (from RM2.60) which values the stock at FY19/20F PE of 25x/22x. Despite the poor performance, we believe fundamentals are still intact while risks to earnings have been well priced in.

Dragged by higher net opex

1Q19 core earnings fell 0.7% to RM58.7m despite higher revenues. This was negated by higher net opex which rose 15.5% on higher operating expenses, advertising cost and maintenance for the MYEG Tower.

No longer contribution from FWRP

On qoq basis, core earnings fell 22.8% in tandem with the completion of FWRP during the quarter. Revenue decline was particularly high due to a one off sales of a GST solutions to an associate company worth RM19.9m.

Moderating expectations

Overall, 1Q19 core earnings trailed ours but inline with consensus’ estimates at 16% and 20% respectively. We believe the disappointment was due to our optimistic view on its foreign worker accommodation and expectations of FWRP continuing into 2019. As such, we pare down our FY19F/20F/21F earnings by 36%/37%/31%.

Maintain BUY at lower TP of RM1.70 (from RM2.60)

Maintain BUY call with lower DCF-derived TP of RM1.70 (from RM2.60) (WACC: 8.6%, g:1%) that values the stock at FY19/20F PE of 25x/22x. We remain positive on MyEG given it strong branding within the IT services space. Besides, we see its plan to expand regionally into the Philippines, Bangladesh and Indonesia would provide structural earnings growth over the longer term.

Source: BIMB Securities Research - 27 Feb 2019