INVESTMENT HIGHLIGHTS

• 5QFY18 normalised earnings increased by +32.4%qoq to RM171.7m, supported by +28.8%qoq growth in revenue

• Cumulative 15MFY18 normalised earnings came in better than ours and consensus expectations

• Actively seeking opportunities to replicate its business model abroad

• Upgrade to BUY with an unchanged target price of RM1.55

Double digit growth in earnings. MY E.G. Services Berhad (MYEG) reported 5QFY18 loss of -RM97.5m. After excluding exceptional items amounting to RM171.7m in relation to the abolishment of the GST regime, 5QFY18 normalised earnings amounted to RM74.3m. This translates into a sequential increase of +32.4%qoq. The improvement in 5QFY18 normalised earnings was mainly premised on: i) the recognition of deferred revenue of RM19.9m (arising from the sale of solution in the previous years to an associate company; and ii) increase in transaction volume form commercial services.

Outperform expectations. Cumulatively, the group’s full year 15MFY18 normalised earnings amounted to RM300.8m. This is achieved primarily attributable to:
i) concession related services such as Immigration and JP related and ancillary series;
ii) commercial series such as motor vehicle trading related services, financing services as well as contribution from Cardbiz group; and
iii) recognition of deferred revenue of RM19.9m.
All in, the group’s full year 15MFY18 financial performance came in above ours and consensus estimates, accounting for 117.5% and 107.6% respectively of full year earnings estimates.

Impact on earnings. While 5MFY18 financial performance came in better than expected, we are maintaining our FY19 and FY20 earnings estimates at this juncture to be on the conservative end. Nonetheless, we have yet exclude the contribution from the tax monitoring project as we believe the group has fair chance of securing the project, albeit lower project value.

Target Price. We are maintaining our target price of RM1.55. This is premised on FY19 EPS of 7.3sen per share pegged to unchanged FY19 forward PER of21.3x. Our target price is one standard deviation below its three year historical average.

Upgrade to BUY. MYEG has an attractive business model which reaps healthy profit margins of more than 50%. This will also be further supported by the foreign worker job matching and placement programme and hostel accomodation business. Meanwhile, MYEG’s experience in building tax monitoring system, would place the group in a better position to clinche the SST monitoring project. We also favour the group’s strategy of monitising its existing expertise abroad. To recall, recently MYEG signed a Memorandum of Understandign with PT Cartenz Technology Indonesia Cartenz) to invest in the Indonesian leading e-Government provider. The strategic partnership will also see MyEG and Cartenz jointly implementing a system which conducts real-time monitoring of business transactions for tax computation purposes across Indonesia. Moreover, expected dividend yield of approximately two percent further add as a sweetener to the stock. Taking into consideration all the above-mentioned factors, we are upgrading our stock recommendation to BUY

from Neutral previously.

Source: MIDF Research - 30 Nov 2018