· Impressive price rally in less than three months. Since our Trading Buy call on 4 December 2014, MYEG’s share price has surged by 21.6% or 45.5 sen to RM2.56 ex-bonus. The share price rally has clearly outperformed the FBMKLCI, which has only climbed by 2.3% to 1798.9 over the same period of time.

· Valuation appears rich at current level. MYEG is currently trading at a forward PER of 27.3x, at a 87% premium to the FBMKLCI forward PER of 14.6x, with its share price exceeded our initial fair value of RM2.37 ex-bonus based on 25.3x FY16 PER (which is at a +1SD level above its 3-year average forward PER). While the group’s earnings prospects remain resilient, its current valuation appears stretched for now. In view of the limited capital upside from here, we advocate investors to take profit now and re-visit the stock when its valuation becomes appealing again.

· CSTM services to be key catalyst moving forward. MYEG’s midterm earnings prospects remain resilient, mainly driven by its Customs Service Tax Monitoring (CSTM) services. The group is believed to see robust growth in its top line (annual contribution of c.RM50.0m based on Phase 1 and Phase 2a) from 1HCY15 onwards. Note that, our assumption of potential RM50.0m annual contributions to its revenue are based on 50k outlets multiplied by RM1000/outlet 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).

· Details in CSTM. To recall, the 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.

· Expanding its immigration services. MYEG is also looking to expand its immigration services to include application for new foreign workers to ease the process of companies bringing in new workers. The group has recently been awarded the online outsourcing contract by the government as the sole listed company to handle the application and renewal of foreign workers permit. We understand that the average revenue per foreign worker permits renewal and application is c.RM100, which includes commissions from insurance premiums required for the foreign 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. Meanwhile, we view that the on-going allegation against MYEG over their handling of foreign workers permit application could potentially hinder their expansion progress in the near-term.

Source: Kenanga