Growing broadband penetration expected to benefit MyEG

This article first appeared in The Edge Financial Daily, on February 9, 2018.
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MyEG Services Bhd
(Feb 8, RM2.48)
Maintain buy with a higher target price (TP) of RM3.75:
Growing broadband penetration to benefit MyEG e-services. We believe MyEG’s dominance in e-government services has been strengthened by high speed Internet following the High Speed Broadband rollout in 2010 and 4G and LTE in 2013. Under the 10th and 11th Malaysia Plan, the government continues to push for increased high-speed Internet coverage under the High Speed Broadband 2, Sub Urban Broadband and Broadband for General Population initiatives which we believe would benefit MyEG. 

Adaptable investments are key despite MyEG’s established branding in e-government services, with 80% of its revenue coming from complementary services (that is non-government services). We expect the trend to continue as MyEG rolls out new services such as the Foreign Workers Accommodations Programme (FWAP) and job matching services. While these measures are at risk because of initiatives to lower foreign labour dependency and adopt Industry 4.0, we believe MyEG’s established information and technology platform could easily adapt to accommodate domestic workforce over time. 

We raise financial year 2018 (FY18) to FY20 forecasts by 22% to 63% on contribution from new services (that is FWAP and job matching) as well as our expectations of higher traffic volume with growing coverage and penetration of high speed Internet as well as MyEG’s established branding within the e-government services segment. 

Maintain “buy” with a higher TP of RM3.75. We reiterate our “buy” recommendation and raise our discounted cash flow-derived TP to RM3.75 (from RM2.65). This implies FY18 price earnings of 43 times before easing to 31 times in FY19. We like MyEG for its sound fundamentals. It boasts free cash flow generation of over RM100 million (excluding expansionary capital expenditure and return on equity sustaining over 30%. 

MyEG also adopts a minimum 30% dividend payout which would provide some returns albeit minimal yield at current prices. — BIMB Securities Research, Feb 8