My E.G has recently released its results for financial year ending 2016, posting stronger annual and quarter profit after tax and minority interest (PATAMI) which increased by 24% and 135% respectively.
 
Macquarie Equities Research (MER) released a research report on Monday morning, making sense of My E.G’s financial results while reiterating its Outperform rating for the stock with a 12-month target price of RM3.85. Read excerpts from the report titled “Still growing at a robust pace” below…

Event

• My E.G. is starting off FY16 with a strong set of results; its PATAMI (Profit after Tax and Minority Interests) of RM28.5mn is up 24% quarter-on-quarter (q-o-q) and 135% year-on-year (y-o-y), as transaction volume for the renewal of foreign worker permits continues to pick up. As MER is expecting the government to announce the amnesty program soon, the strong earnings growth will continue into coming quarters.

 
Impact

• Foreign Workers’ Permit (FWP) renewal and related services revenue is now 50% of the group revenue. My E.G. is now processing close to 130k transactions a month, an increase from 100k in the 4QFY15, but still below the theoretical rate of 180k transaction per month rate (Based on 2.2mn workers). As the number of transactions moves closer to the 180k per month, MER is expecting the earnings growth to continue.

• Amnesty will be the catalyst and will be announced soon. MER is expecting the amnesty program to be announced by the government soon, as the contract is only valid until 4 March 2016, and it will take the consortium (including My E.G.) at least 2-3 months to register the illegals. MER believes that My E.G. can record close to RM100mn in revenue from the program, which constitutes 25% of MER’s full-year revenue forecast.

• Still waiting to hear good news on GST EMS. There is still no update from the government on the implementation date of the goods and services tax’s Electronic Monitoring System (GST EMS) program. Even if the government were to delay the implementation date further (current target start date is Apr’16), the impact to MER’s forecast would be relatively minimal, as MER is only expecting it to contribute 5% of FY17E revenue.

 
Earnings and target price revision

• No change.

 
Price catalyst

• 12-month price target: RM3.85 based on a discounted cash flow methodology.

• Catalyst: Announcement of the amnesty program by the government.

 
Action and recommendation

• Reiterate Outperform recommendation as MER believes the stock valuation is not rich due to the strong growth rate, as price earnings ratio (PER) will fall from 62x FY15 to 17x in FY17E.

• Macquarie Quant views on the stock is favourable too, ranking it 29th out of 647 stocks in Software & Services, with the strongest style exposure being Profitability.

Source: Macquarie Research - 1 Dec 2015