This article first appeared in The Edge Financial Daily on September 28, 2017

My EG Services Bhd
(Sept 27, RM2.02)
Maintain add with a higher target price of RM3.04: My EG Services Bhd (MyEG) has faced some teething problems in the past few months during the installation of dongles at the older cash registers (more than five years old) at food and beverage (F&B) outlets in the Klang Valley. However, it said all issues had been resolved. MyEG has so far installed 5,000 dongles in the Klang Valley at F&B outlets and is targeting to install nationwide by year end (our earlier target was June 2017).

The Malaysian Employers Federation estimates that there are around two million illegal foreign workers (IFWs) in the country. By the end of the rehiring programme in end-2017, we expect the government to register about one million IFWs. However, we believe there would still be another one million unregistered IFWs.

MyEG has recently started a new service to match employers with unregistered IFWs (under the rehiring programme). This service allows employers to source new foreign workers from the existing IFW base. MyEG gets RM1,000 for matching an employer with an IFW. We also expect the company to benefit from selling the compulsory foreign workers’ insurance to the employers. MyEG said it will ensure the welfare of foreign workers, by making sure their salaries are paid and there is no worker abuse by the employers.

In the next one year, MyEG is targeting to place out 100,000 foreign workers. In our earnings forecasts, we assume a more conservative average of 5,000 foreign workers monthly or 60,000 foreign workers annually. This would help MyEG generate an average annual revenue of RM60 million. We assume 50% net profit margin for the matching service (in line with the 50% net profit margin from existing foreign worker service), hence an annual net profit of RM30 million.

Overall, we estimate that the potential income from the new matching service will not be able to offset the loss of income from the delay in the implementation of the goods and services tax (GST) monitoring project. As such, we lower our financial year 2018 (FY18)-FY19 earnings per share (EPS) by 8.4%-19.1% mainly to reflect the delay in the completion of the nationwide launch of GST monitoring project phase one. However, we raise our FY20 EPS forecast by 6.3% to reflect higher earnings from foreign workers matching service. — CIMB Research, Sept 27