INVESTMENT HIGHLIGHTS

• FY17 earnings grew by +41.0%yoy to above RM200m

• Higher revenue was seen across all business segments

• Depleting cash reserve remains a concern

• Valuation remains stretched

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

Another record year. MY E.G. Services Berhad (MYEG) 4QFY17 earnings came in at RM59.5m, an increase of +16.7%yoy. This was mainly supported by +20.3%yoy growth in revenue to RM105.1m. The increase in revenue was led by:

1. 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, and
2. increase in revenue contribution from motor vehicle trading related services. However, the increase in the quarter’s revenue was partially offset by:
3. higher personnel related expenses and operating expenses to support the growth in FWP and FWR services,
4. higher marketing and sponsorship expenses,
5. higher interest cost from theterm loan to finance MYEG’s newly acquired offices, and
6. higher depreciation charges.

Within expectation. Cumulatively, MYEG’s full year FY17 earnings surge by +41.0%yoy to RM201.5m. This is in-tandem with the growth in revenue of +31.9%yoy. All in, MYEG’s FY17 financial performance came in within ours and consensus expectations, accounting for 101.6% and 101.9% of full year FY17 earnings estimates respectively.

Lower cash reserve. Despite recording better earnings, MYEG’s 4QFY17 cash reserve has reduced by -34.3%yoy to RM137.6m (4QFY16: RM209.7m). Moreover, the group’s total borrowing has increased by +28.0%yoy to RM137.3m. As a result, the net cash position has shrunk to merely RM0.3m as compared to RM 102.4m in 4QFY16.

Target Price. We are maintaining 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.

Dividend. The group declared final dividend of 1.2sen per share in 4QFY17 (4QFY16: 1.3sen per share). Cumulatively, the group has declared a total dividend of 1.7sen per share for FY17 as compared to 1.8sen per share declared for FY16. This is slightly below our FY17 full year expectations of 1.8sen per share.

Maintain NEUTRAL. MYEG has an attractive business model which reap a healthy profit margin of more than 50%. This will also 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. In addition, we view that the current valuation is rather unattractive for potential investors to take position on the stock. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 30 Aug 2017