Macquarie Equities Research (MQ Research) released another report on My E.G. Services (MYEG) this morning following the termination of MYEG’s contract with the Immigration Department, for the rehiring of undocumented foreign workers, by end June 2018. MQ Research maintains their target price (TP) of RM1.00 as they expect that this termination will not impact MYEG’s earnings from FY19 onwards.

Event

• The newly appointed Home Minister, Tan Sri Muhyiddin Yassin, announced that the contract for rehiring of illegal foreign workers (FW) will not be extended beyond 30 June 2018. Note that this particular contract is separate from the FW permit renewal, which will continue to be the primary driver of MYEG’s earnings. Management had always anticipated the non-renewal of the rehiring contract and MQ Research’s earnings estimates have constantly reflected this assumption. Therefore, the termination of the contract does not impact MYEG’s earnings from FY19 onwards; hence MQ Research maintains their TP of RM1.00.

Impact

• The program was meant to end in June 2018. To recap, this program was introduced in 2015 by the previous government to legalise c.1.5-2mil FW. MYEG was one of the three vendors appointed to undertake this program. These contracts were renewed several times and were initially meant to end by Dec 2017. However, the government granted these vendors a six-month extension until June 2018 to clear remaining backlog. The termination of this contract does not impact MYEG’s earnings prospects.

• Actual rehiring volume was lower than expected. MQ Research had previously estimated for MYEG to register 800k of FW under the program. However, the immigration department reported that only a total of 750k FW were registered by the three vendors. Management shared that it commands the largest market share, therefore, assuming a worst case market share of 35% for MYEG, MQ Research estimate a maximum impact on their FY18E profit after tax (PAT) estimates of -7.8%. This was fully reflected in 9MFY18 earnings, which make up 63% of MQ Research’s FY18 estimates. Having said that, MQ Research estimates MYEG’s earnings for FY19E onwards will remain intact.

Action and Recommendation

• Maintain Outperform (OP) with TP of RM1.00 as MQ Research believes MYEG will continue to deliver quality earnings as evidenced by its commendable 20% growth year-on-year (y/y) for 9MFY18 released last week. While the risk of losing market share is imminent, MQ Research estimates that MYEG could still generate high PAT margins of >30%. Being a pioneer in providing e-gov services, it has amassed a large customer base, allowing it to offer its services at favourable rates thanks to economies of scale. This gives MYEG a competitive advantage in the first few years after new entrants emerge. Also, MYEG is rapidly expanding its e-gov services in the Philippines. It has secured at least three agencies to date, processing c.10k transactions a month. With more agencies in the pipeline, the income from this segment could partially offset the loss of earnings from a reduced market share in the domestic market.

Source: Macquarie Research - 4 Jun 2018