Robust 1Q15 result. My E.G. Services (MyEG) recently announced an encouraging set of 1Q15 results which saw its net profit jumping by 40.9% YoY to RM12.0m on the back of 35.8% YoY surge in revenue. This was mainly driven by: (i) higher contribution from its JPJ services, thanks to higher usage of its online vehicle ownership transfer, and (ii) strong volume transacted from its online renewal of foreign workers permit. On a QoQ basis, MyEG’s recorded a PBT of RM12.1m, a decrease of 28.4% mainly due to seasonality weakness where the group typically experiences lower demand for JPJ services during the end of the year.

CSTM ready to roll out. MyEG is looking to see robust growth in its top line (annual contribution of c.RM50.0m based on Phase 1 and Phase 2a) from 1HCY15 (2HFY15) onwards should its upcoming Customs Service Tax Monitoring (CSTM) services are implemented successfully. Currently, the group is still waiting for the final approval from Government and targeting to roll out its CSTM services in 1QCY15 (3QFY15). Note that CSTM service will be launched in two different phases, Phase 1 and Phase 2. Phase 1 (3QFY15) involves the monitoring of the sales transactions of the present Service Tax License holders in categories C and D (restaurants, pubs and massage parlours) with annual revenue above RM3m (c.50k outlets). Meanwhile, Phase 2 will be to monitor GST collection (beginning 1st April 2015) of those outlets (c.40k outlets) in categories C and D whose annual sales fall between RM0.5m-RM3m (in Phase 2a) and to be extended to retail sector (c.500k-800k) in Phase 2b. Revenue-wise, we understand that it will be based on fixed fees payable by Government, by RM1000 per outlet based on a compounding 10% cumulative tax revenue collected from last year. Our assumption of potential RM50m annual contribution to its revenue are based on 50k outlets multiplied by RM1000 if the threshold of 10% cumulative tax revenue growth were met from previous year. We view that this is achievable judging from the Government’s Economic Report 2014/2015 which forecasted total Sales tax, service tax and GST revenue to be at RM26.3b in 2015 (+47.8% from RM17.8b in 2014).

Road Safety Project starts diagnostic in 1QCY15. We gather that the government had recently made it mandatory for commercial buses to install road safety diagnostic kit within a year and MyEG has taken part in the programme with its road safety project already undergoing its pilot testing phase (of 12 buses) with the Land Public Transport Commission (SPAD). Note that the diagnostic kit will be used to diagnose real time conditions of the driver in monitoring their driving pattern and condition of the vehicles. The Group is targeting to roll out its services in 1QCY15 with phase 1 targeting c.30k local express buses and phase 2 targeting c.100k lorries and goods vehicle. While there will be no charges on the bus companies for the installation of the diagnostic kit (as MyEG will bear the cost of RM5,000/kit, totalling to RM150m), these bus companies will be mandated to purchase the insurance coverage from MyEG in return. We understand MyEG would benefit from c.10% per insurance fee for each express bus where the group has targeted to capture c.20% of the RM1.2bn annual commercial bus industry insurance premiums. Note that we have yet to assume any potential earnings from the Road Safety Project, to be on the conservative side.

Immigration services to see expansion. MyEG is looking to include application for new foreign workers into its immigration services to ease the process of companies bringing in new workers. As of this juncture, the company’s foreign workers permit renewal services has a market share of c.5% of the 2.5m legal foreign workers in the country. With the new service in the pipeline, we are expecting the group’s market share to grow to c.15% (c.38k foreign workers) in FY16. We understand that the average revenue per foreign worker permits renewal and application is c.RM 100, which includes commissions from insurance premiums required for the foreign workers.

1:1 bonus issue to increase liquidity. Note that MyEG had in early November announced a 1-to-1 bonus issue that will enlarge its share base from 600m to 1,200m. We lauded the corporate exercise as this will improve its shares trading liquidity with at more affordable stock prices. We gather that the exercise will be completed in 1QCY15 (3QFY15).

A 2-year NP CAGR forecast. We are forecasting the group to register a 2-year NP CAGR of 49%, bringing its NP of RM50.7m in FY14 to NP of RM113.9m in FY16. Our forecast assumptions are mainly underpinned by a conservative 2-year revenue CAGR of 20% in its JPJ services (recall that the group registered +44% YoY growth in FY14), market share of Immigration to grow to c.15% in FY16 (from current 6% on c.2.6m foreign workers) and CSTM revenue contribution of RM25m in FY15 and RM50m in FY16 respectively.

Trading BUY with a TP (cum-bonus) of RM4.73. We value the stock at RM4.73/share at 25.3x FY16 PER, which is at a +1SD level above its 3-year average forward PER as we believe that the potential robust revenue growth from its new services (Note that we have yet to factor in the contribution from Road Safety Project) as well as its recurring income profile deserves a premium valuation. We also see the counter as the proxy to the GST play given its CSTM services.

Source: Kenanga