INVESTMENT HIGHLIGHTS

• 9MFY17 earnings surged by +62.8%yoy, lifted by +37.1%yoy growth in revenue

• Transaction volume across its various business segments continue to grow

• Lower net cash reserve could limit future capital spending and M&A opportunities

• Steep increase in share price lead to unattractive valuation

• Downgrade to NEUTRAL with an unchanged target price of RM1.89 per share

Strong 9MFY17 performance. MY E.G. Services Berhad (MYEG) 3QFY17 earnings came in at RM53.9m, which translates into an impressive earnings growth of +62.8%yoy. This lifted the group’s 9MFY17 earnings by +54.5%yoy to RM142.0m. The increase in earnings was mainly attributable to:

i) higher transaction volumes from the online renewal of foreign workers’ permits (FWP), foreign workers rehiring programme services (FWR services) and foreign workers insurance from both FWP as well as FWR services,

ii) increase in revenue contribution from JPJ related services, and

iii) increase in revenue contribution from motor vehicle trading related services.

Within expectation. All in, MYEG’s 9MFY17 earnings came in at 71.6% and 72.3% of full year FY17 earnings estimates respectively. We expect the positive momentum will continue to be seen in 4QFY17.

Lower cash reserve. MYEG’s 3QFY17 cash reserve has reduced by - 25.3%yoy to RM156.6m. As a result, the net cash position has shrunk by -45.6%yoy to RM55.7m.

Target Price. We maintain our target price of RM1.89 per share. This is premised on FY18 EPS of 7.2sen per share pegged to FY18 forward PER of 26.3x. Our target price is based on its 3-year historical low PER.

Downgrade to NEUTRAL. MYEG has an attractive business model which reap a healthy profit margin of more than 50%. This will be further supported by the upcoming custom tax projects. However, we are concern with the declining cash reserve as this could limit the group’s future capital spending as well as the ability to fund for new M&A opportunities. While we applaud the group’s active M&A exercise, we view that these acquisitions will not have significant impact on the group’s bottomline in the near term. Due to the steep increase in share price, we view that the current valuation (i.e. PER more than 30x) is rather unattractive for potential investors to take position on the stock. All factors considered, we are downgrading our stock recommendation to NEUTRAL from buy previously.

Source: MIDF Research - 31 May 2017