We expect earnings for IT services companies under our coverage to grow 18-20% in 2020 in view of continuous growth for Malaysia digital economy. According to the Department of Statistics, Malaysia’s digital economy has grown at 7.9% CAGR to RM268bn over 2015 – 2018. In 2018, digital economy contributed 18.5% of total GDP and expected to expand to 20% in 2020 underpinned by ongoing government’s efforts to adopt digitalisation in business operations supported by strong internet and smartphone penetration rate. This is well translated in Budget 2020 allocation to encourage digital implementation within small and medium enterprises (SMEs) and increase cashless payment transaction volume under e-Tunai initiatives.
We remain positive on IT services as we see government support towards digitalisation to benefit companies under our coverage. Our favourite is GHL (BUY, TP: RM1.80) underpinned by governments’ effort across its market exposure to adopt cashless payment. We see growing mobile payment trend across Asia market to provide additional earnings growth to GHL’s TPA business. We also like MYEG (BUY, TP: RM1.70) given its strong branding and solid track record in e-government services space would give MYEG an edge over prospective competitors looking to enter the space. Besides, we see its overseas business expansion (Philippines, Bangladesh and Indonesia) to reduce single marker exposure and provide structural earnings growth over the longer term. However, we see government’s plans to reduce dependency on foreign worker to present downside risk to earnings given its large foreign worker-related business exposure (c.40-50% total revenue).
We maintain our OVERWEIGHT outlook on IT Services sub-sector given the positive long-term earnings prospects and what we view as valuations being at discount as both now trading at -1SD. Our positive view on IT services sub-sector is premised on 1) ongoing governments’ effort to adopt digitalisation across region, 2) increase in internet and smartphone penetration rate and 3) continued business expansion coming from overseas market venture.
Source: BIMB Securities Research - 30 Dec 2019
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