MyEG Services Bhd
(Aug 30, RM2.19)
Maintain add with a higher target price (TP) of RM3.22: While MyEG Services Bhd’s financial year ended June 30, 2016 (FY16) revenue was up 99% year-on-year (y-o-y) at RM281.6 million, net profit growth was even stronger at 141.8% y-o-y to RM142.9 million, mainly due to greater economies of scale. A 1.3 sen final dividend per share (DPS) was declared, in line with our expectations. For FY16, MyEG is paying a total DPS of 1.8 sen, equivalent to a 30% net dividend payout ratio. On Tuesday evening, MyEG also announced a proposed one-for-two bonus issue, which was a positive surprise.

Although the government has not announced any extension of the rehiring programme (registration of illegal foreign workers [IFWs]) since end-June, a check on MyEG’s website shows that the rehiring programme is ongoing. As at end-June, the company had registered 300,000 IFWs, and in our forecast, we assume that the company will register an additional 700,000 IFWs in FY17. We understand that the government has asked the courts to impose harsher punishments on employers that continue to hire IFWs.

Since April, the MyEG-Celcom Axiata Bhd joint venture has started supplying Celcom SIM cards to foreign workers. The average revenue per user (Arpu) is currently RM35. We assume a conservative RM25 Arpu and the company getting 7% of the proceeds in a revenue-sharing scheme with Celcom. We estimate that by 2017/2018, more than two million foreign workers will be holding Celcom SIM cards.

MyEG’s balance sheet was RM102 million net cash or RM4.3 net cash per share as at end-June. Capital expenditure (capex) for Phase 1 of the GST Monitoring Project (GMP) has been completed. We believe that MyEG may need at least another RM300 million for Phase 2 capex, but this should be adequately financed through operational cash flows.

MyEG is diversifying into a new business, that of providing hostel accommodation for foreign workers. The first hostel was launched recently in Melaka, and we believe the company is targeting to provide these services nationwide in the next two to three years. The average rental is RM200 per month.

The country will have an estimated three million registered foreign workers in 2017, and even if the company can provide accommodation for just 20% of them, annual revenue from this business could hit RM1.4 billion in three years’ time.

We maintain our earnings per share (EPS) forecasts and add new FY19 numbers. In view of the strong 52% three-year EPS compound annual growth rate outlook, we raise our TP from RM2.68 to RM3.22 as we value the stock at a 20% premium to 21 times price-earnings ratio target for the sector for 2017. Rerating catalysts include stronger-than-expected registration of IFWs and a successful launch of the GMP. Downside risks include further delays in the GMP launch. — CIMB Research, Aug 29