Macquarie Equities Research (MQ Research) believes that the shares of MY E.G. Services (MYEG) have been oversold since March’s share-price peak, driven by the political instability in Malaysia. MQ Research notes MYEG’s earnings trajectory is intact, with it being a beneficiary of a prolonged lockdown due to the boosting of its online road tax renewals and elevated Covid-19 testing. MQ Research believes that MYEG is more politically agnostic now due to stable earnings, contract extensions, and diversified revenue streams.

In a report dated 15 July, MQ Research raises its estimations for MYEG’s FY21 earnings as well as its target price to RM2.43. Investors may gain leveraged exposure to MYEG with the call warrant MYEG-C1S, which has an exercise price of RM1.95.

Decreasing political risks, intact earnings trajectory

• MQ Research reiterates its Outperform recommendation on the shares of My E.G. Services Bhd (MYEG) (51% total shareholder return (TSR)). MYEG’s share price has declined 27% since its peak in early-March 2021 (vs KLCI -4%), driven by political instability in Malaysia and news flow regarding a tender for Covid tests, and has reached MQ Research’s bear-case valuation. MQ Research believes the chance of further downside to the share price is low, as these risks have been priced in, and MQ Research advises investors to continue accumulating on weakness. MYEG is proving to be politically agnostic, with demonstrable earnings resilience and contract extensions. MQ Research’s estimate for a 21% net profit (NP) compounded annual growth rate (CAGR) FY21–24E supports a share price re-rating.

2021E earnings on track, multiple projects being pursued

• FY21E results could surprise on the upside. Elevated Covid test volume and road tax renewals from lockdowns could provide the potential for an upside surprise to 2H2021 earnings. MQ Research is confident of seeing sequential quarter on quarter (QoQ) and year on year (YoY) earnings growth underpinned by healthcare and road transport services. In the short term, the intensive testing mandated for factory workers (2x a week), intended to reduce positive rates, coupled with prolonged lockdowns should boost testing volume. MQ Research expects policy objectives to shift to address Covid-19 as endemic, and thus testing will likely remain elevated. Subsequently, a border reopening would benefit the immigration segment.
• Back-to-back projects to sustain earnings. Although MYEG lost the recent tender to operate a screening facility in KLIA, MQ Research remains confident of its earnings trajectory, as the company is pursuing many projects: 1) introducing Covid breathalyser tests for travellers across all checkpoints, 2) signing a letter of intent with Zhifei to supply vaccines for the private market, 3) providing an e-testing service for the Road Transport Dept. to automate driving license issuance, and 3) providing an overseas visa system with vaccination certificates.
• Political risks priced in, further downside is low. MQ Research believes MYEG is more politically agnostic now due to 1) government contract extensions even after three government changes since 2018, helping to sustain stable earnings, and 2) revenue diversification. Also, extensive integration into the government’s legacy back-end systems makes MYEG difficult to replace.

Earnings and Target Price Revision

• FY21E profit +14%, as the tax exemption deadline has been adjusted to November 2021 from April. Target price +0.4% to RM2.43.

Price Catalyst

• 12-month price target: RM2.43 based on a discounted cash flow (DCF) methodology.
• Catalyst: extension of tax exemption, higher covid-related earnings.

Action and Recommendation

• Outperform reiterated.

12-month Target Price Methodology

• MYEG MK: RM2.43 based on a DCF methodology

Source: Macquarie Research - 15 Jul 2021