Macquarie Equities Research (MER) believes that MYEG will continue to be the preferred government e-service provider, with growing business volume and profit margin expansion. Hence, they have reiterated their outperform recommendation on MYEG. 

Outperform with a TP of RM2.60 (27% upside) 

MER reiterates their Outperform recommendation on MYEG with a DCF-derived TP of RM2.60. MER likes MYEG for its asset-light business model, high ROE (>30%) and exciting three-year earnings CAGR of 61%. A pick-up in registrations under the rehiring program or possible announcement of a Goods and Services Tax Electronic Monitoring System (GST EMS) program by end-CY16 could rerate the share price from its undemanding 19x CY17E PE. Additionally, Macquarie’s quant model ranks MYEG within the top 3% amongst 660 global software and services companies. Coverage was transferred to Isaac Chow in February.

High profit margin, high ROE

MYEG’s businesses deliver high EBIT margins (40%-48% in FY10-15A) and good ROE of 22%-28% due to its scalable business model. As an e-government services concessionaire, MYEG self-funded the R&D costs to develop its proprietary technology. As MYEG continues to develop its infrastructure (software and hardware) and gain market acceptance, MER believes it will be the clear leader in Malaysia e-government services segment. Its growing user base and increase in product offerings should enable MYEG to sustain profit margins.

Earnings is expected to quadruple by FY18E

MYEG’s earnings are at a tipping point – 1HFY16A net profit grew 125% yoy to RM59m, and MER forecasts net profit to quadruple by FY18E, driven by business volume growth and profit margin expansion. Key growth drivers are:

• Foreign worker’s permit (FWP) renewal. Cessation of over-the-counter FWP renewal services in May’15 channels transactions onto MYEG’s online portal. Together with an increase in FWP quotas under the ongoing Illegal Foreign Worker Rehiring Program, MER forecasts MYEG’s FWP revenue to jump from RM40m in FY15 to RM260m in FY18E.

• GST EMS fuel second leg of earnings growth. MER expects the government to announce the GST EMS program by end-CY16, leading to installation of 100,000 GST EMS by FY18E, contributing an additional RM75m in revenues.

Bull case FV at RM2.93 (+44%), bear case at RM1.94 (-5%)

MER’s bull case fair value of RM2.93 assumes addition of 1.5m FWP quotas, faster roll-out of GST EMS Phase 2 (100,000 units per year) and higher market share gains for key commercial products. Conversely, MER’s bear case FV of RM1.94 is based on 0.5m addition in FWP quotas, lacklustre roll-out of GST EMS Phase 2 @ 30,000 units per year and lower commercial market share gain.

Risk of non-renewal of master concession is low

MER believes that risk of non-renewal of master concession in 2020 is low, as the government has yet to develop any parallel delivery channel. Besides, MER expects MYEG to gain strong consumer trust as the preferred e-government service provider by 2020, supporting its case for contract renewal.

Source: Macquarie Research - 31 Mar 2016