MyEG Services  Bhd
(Dec 4, RM 4.16)
“Trading buy” with target price (TP) of RM 4.73. MyEG Services (MyEG) recently announced an encouraging set of first quarter financial year ending 2015 (1QFY15) results, which saw its net profit jumping by 40.9% year-on-year (y-o-y) to RM12 million on the back of 35.8% y-o-y surge in revenue. This was mainly driven by higher contribution from its Jabatan Pengangkutan Jalan (JPJ) services, thanks to higher usage of its online vehicle ownership transfer and strong volume transacted from its online renewal of foreign workers’ permits. On a quarter-on-quarter (q-o-q) basis, MyEG’s recorded a profit before tax (PBT) of RM12.1 million, a decrease of 28.4% mainly due to seasonality weakness where the group typically experiences lower demand for JPJ services during the end of the year.

MyEG is looking to see robust growth in its top line (annual contribution of RM50 million based on Phase 1 and Phase 2a) from first half calender year 2015 1HCY15 (2HFY15) onwards should its upcoming Customs Service Tax Monitoring (CSTM) services be implemented successfully. Currently, the group is still waiting for the final approval from the government and is targeting to roll out its CSTM services in 1QCY15 (3QFY15).

Note that CSTM services will be launched in two different phases. Phase 1 (3QFY15) involves the monitoring of the sales transactions of the present service tax licence holders in categories C and D (restaurants, pubs and massage parlours) with annual revenue above RM3 million (50,000 outlets). Phase 2 will be to monitor the GST collection (beginning April 1, 2015) of those outlets (40,000 outlets) in categories C and D whose annual sales fall between RM0.5 million and RM3 million (in Phase 2a) and to be extended to the retail sector (RM500,000 to RM800,000) in Phase 2b.

Revenue-wise, we understand that it will be based on fixed fees payable by the government by RM1,000 per outlet based on a compounding 10% cumulative tax revenue collected from last year. Our assumption of the potential RM50 million annual contribution to its revenue is based on 50,000 outlets multiplied by RM1,000 if the threshold of 10% cumulative tax revenue growth were met from the previous year. We view that this is achievable judging from the government’s Economic Report 2014/2015, which forecasts total sales tax, service tax and GST revenue to be at RM26.3 billion in 2015 (+47.8% from 2014).

Note that MyEG in early November announced a 1-to-1 bonus issue that will enlarge its share base from 600 million to 1.2 billion shares. We laud the corporate exercise as this will improve its shares trading liquidity with more affordable stock prices. We gather that the exercise will be completed in 1QCY15 (3QFY15).

We are forecasting the group to register a two-year net profit (NP), compound annual growth rate (CAGR) of 49%, bringing its NP of RM50.7 million in FY14 to NP of RM113.9 million in FY16. Our forecast assumptions are mainly underpinned by a conservative two-year revenue CAGR of 20% in its JPJ services (recall that the group registered +44% y-o-y growth in FY14), market share of immigration to grow to 15% in FY16 (from current 6% on 2.6 million foreign workers) and CSTM revenue contribution of RM25 million in FY15 and RM50 million in FY16 respectively.

We value the stock at RM4.73 per share at 25.3 times FY16 profit to price-earnings ratio (PER), which is at a +1 Standard Deviation level above its three-year average forward PER as we believe that the potential robust revenue growth from its new services (note that we have yet to factor in the contribution from the Road Safety Project) as well as its recurring income profile deserves a premium valuation. We also see the counter as a proxy to the GST play given its CSTM services. — Kenanga Research, Dec 4

This article first appeared in The Edge Financial Daily, on December 5, 2014.