Following MY E.G. Services’ (MYEG) 2Q21 recent results announcement, Macquarie Equities Research (MQ Research) hosted a call with MYEG’s Head of Investor Relations for further insights on the company's results and business activities.

While MYEG’s higher 2Q21 revenue was mainly driven by the healthcare sector, MQ Research expects the company’s core and new business could cushion its earnings once the healthcare segment revenue diminishes in 2022E. MQ Research also summarised MYEG’s updates on new upcoming projects including breathalyzer test, Zhifei vaccine and vaccine passport, among others. Read on the excerpt of MQ Research’s report dated 1 September for more.

Event

• MQ Research hosted Mr Benjamin Low, Head of Investor Relations from MYEG, to discuss 2Q21 results yesterday (Wednesday, 1 Sept).

Key drivers of results and update on new projects

• 2Q results – key drivers. The revenue split between immigration : road transport : healthcare this quarter was approximately 40%:35%:25%, and the key driver for higher year-on-year (YoY) revenue was the healthcare segment. Covid tests were flat quarter-on-quarter (QoQ), but quarantine services picked up this quarter as demand for Malaysians to quarantine increased as the country continues to battle with high Covid-19 cases. Although MQ Research notes this is a lower-margin business for MYEG compared with its other services, higher occupancy this quarter supported margin expansion QoQ, as MYEG incurred most of the quarantine set-up costs in 1Q21. Although softer revenue was recorded for the road tax renewal due to a shortage of road tax disc supplies from lockdown, management expects this segment to pick up in 2H21. Moving forward, MQ Research expects the company’s core businesses and potentially its new businesses could cushion its earnings once healthcare segment revenue tapers off in 2022E

​Update on New Projects.

• Breathalyzer test – Management expects approval to be granted in the next one to two months from the Ministry of Health (MOH), as satisfactory data has been collected on test results based on a pilot done in KLIA. Depending on how many entry points MYEG plans to roll out for this service, the company will need to invest some capex for the breathalyzer devices (~US$0.7mn/device). 2) Zhifei vaccine – Targets ‘booster shot’ market, with expected roll-out in 4Q21. 3) Vaccine passport – Proof of concept being done in Phuket, Thailand, with several collaborations with similar service providers in other markets to increase vaccination database. 4) E-testing – Infrastructure has been ready, pending deployment at several driving test sites for pilot tests.

• Bull case – GST re-introduction? According to the pre-budget statement, a tax revenue committee has been set up to study how to ensure tax revenue collection increases in tandem with the country’s gross domestic product (GDP), with findings to be published in 2022. MQ Research believes that although the goods and services tax (GST) will broaden Malaysia’s tax base and increase tax collections, timing will be crucial. There has been some pushback by the industry players to introducing the GST in 2022 (SME association), and they are proposing for a reintroduction to be done only when the economy stabilises in 2023/24 at a lower rate (3%). In MQ Research’s bull-case scenario (valuation of RM3.39, assuming tax exemption continues with GST reintroduced end-2022), MQ Research estimates GST adds 7–24% valuation upside to its RM2.43 target price with profit impact of +5–19% FY22–25E. This would depend on the revenue structure and merchants’ revenue thresholds set by the government for them to be part of GST.

Action and Recommendation

• Although the share price has rerated 16% since the week of 16 August (during the change in Malaysia’s Prime Minister, which MQ Research believes provided some stability to the political environment) vs KLCI +6%, MQ Research maintains its view that MYEG is proving to be politically agnostic due to demonstrable earnings resilience, as the company has created significant moat for its services, contract extensions, and diversified revenue streams. MQ Research is estimating a 16% net profit in compound annual growth rate FY21–24E to further support a share price re-rating. Outperform maintained.

12-month Target Price Methodology

• MYEG MK: RM2.43 based on a Total Shareholder Return methodology.

Source: Macquarie Research - 2 Sept 2021