MY E.G. Services (MYEG) announced yesterday that it completed the book-building exercise in relation to the private placement, raising a total gross proceed of RM214.2mil from the 210mil new shares issued at RM1.02. While Macquarie Equities Research (MQ Research) views that the placement may dilute MYEG’s existing shareholders, it is optimistic that the cash would boost MYEG’s earnings if it is properly deployed on projects such as JPJ e-testing and Zhifei Vaccine. MQ Research maintains an Outperform rating with a bull-case target price of RM2.09. Read on for an excerpt of MQ Research’s report dated 19 October.

RM670mn Potential Net Cash Post Placement

• MYEG is proposing to raise an estimated RM309mn via a 4.17% private placement of 300mn new shares (instead of the 100mil initially planned). Recall, MYEG has completed the first tranche of its 2020s placement, where 120mil shares were issued to raise ~RM216mil worth of capital. MYEG has indicated that the utilisation of proceeds is to fund several ongoing projects, including 1) health tech (Zhifei vaccine clinical trials, breathalyser test), 2) road transport e-testing project, and 3) blockchain-related solutions in the next 12–24 months.

Mildly dilutive to existing shareholders, overall positive

• Net cash will double. With RM309mn expected to be raised from this placement, MYEG will potentially double its net cash position, as it is already carrying RM360mn net cash as of 2Q FY21. At this point, MYEG has utilised 53% of its RM216mn initial placement, which was mainly used for healthcare-related services and asset purchases for its e-government services.

• New scope related to blockchain development. Of this placement, 57% will be used for the company’s newly announced blockchain-related initiatives, such as decentralised finance services and setting up supernodes that are compatible with China’s national blockchain infrastructure. Potential use cases related to the supernodes network are to provide solutions such as end-to-end traceability and finance along the flow of goods between China and the rest of the world.

• Mildly dilutive to shareholders. MYEG is on track for a record year, with RM333mn adj. net profit for FY21E. The placement will dilute existing shareholders by 4%, but if properly deployed MQ Research believes the cash would boost MYEG’s earnings base to potentially reach MQ Research’s bull-case scenario.

Action and Recommendation

• Maintain Outperform. MQ Research estimates the bluesky valuation for MYEG provides 71% fair-value upside to MQ Research’s base-case valuation of RM1.22, at RM2.09. MQ Research is incrementally positive on MYEG as the placement provides more certainty on JPJ e-testing (5–8% valuation upside) and Zhifei vaccine (~3% valuation upside).

• MQ Research has not factored recent blockchain and breathalyser tests initiatives into its bull-case scenario.

12-month Target Price Methodology

• MYEG MK: RM1.22 based on a Total Shareholder Return methodology

Source: Macquarie Research - 21 Oct 2021