This article first appeared in The Edge Financial Daily, on December 1, 2015.

MyEG Services Bhd
(Nov 30, RM3.41)
Maintain add with a higher target price (TP) of RM5.67:  MyEG Services Bhd’s (MyEG) first quarter ended Sept 30, 2015 (1QFY16) revenue was up 119% year-on-year (y-o-y), mainly due to a higher contribution from foreign workers’ permit renewal (FWPR) services. The 1QFY16 net profit growth was higher at 132% y-o-y, likely due to greater economies of scale. No interim dividend per share was declared, which was in line with our expectations. 

In our view, MyEG’s FWPR services will start to contribute significant earnings this financial year. In May, the government announced that it would pay the employers’ MyEG online FWPR processing fee of RM35 per foreign worker and all employers to use the FWPR. In addition, MyEG earns additional revenue of RM70 per foreign worker from the sale of the compulsory foreign worker’s insurance annually. There are currently 2.5 million legal foreign workers in the country and we believe around five million are illegals. 

The government has appointed MyEG to set up and maintain a database of foreign workers in the country. MyEG would be able to effectively maintain the database by using the FWPR services. In October, the Malaysia Competition Commission proposed to impose a financial penalty on MyEG for abusing its dominant position in the provision and management of FWPR applications. This should no longer be an issue, as MyEG has opened this gateway to other insurance companies.  

We expect the custom service tax monitoring system (CSTM) project to be launched in mid-2016 or earlier. The company decided to postpone the CSTM launch, as it would be tough for the management to handle the registration of illegals and the CSTM at the same time. The CTSM’s Phase 1 targets the food and beverage sector and around 50,000 outlets nationwide will come under it. 

We maintain our financial year ending June 30, 2016 (FY16) to FY18 earnings per share forecasts, but raise our TP as we roll over to calendar year 2017’s 21 times, in line with peers. The stock remains an “add”, with the registration of illegal foreign workers and successful launch of the CSTM as potential rerating catalysts. — CIMB Research, Nov 30