MyEG overseas ops are expected to be profitable from this year

This article first appeared in The Edge Financial Daily, on April 15, 2019.
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My EG Services Bhd
(April 12, RM1.57)
Maintain add with an unchanged target price (TP) of RM1.96:
My EG Services Bhd’s (MyEG) domestic operations remain stable one year after Malaysia’s 14th general election in May 2018. It continues to handle most of the annual renewals of foreign workers’ working permits (FWWPs) in the country. We estimate that its FWWP division, which also sells compulsory foreign workers’ insurance, currently contributes to more than 50% of its group revenue.

We expect the government to finalise the quota for new foreign workers (NFWs) soon. This should be positive for MyEG’s existing matching service (matching new or legalised foreign workers with employers) division. In view of its established FWWP operations in the country, we believe MyEG’s matching division is expected to match new foreign workers for some major multinational corporations once the quota for NFWs is finalised. We forecast MyEG matching 50,000 NFWs annually in financial year 2019 (FY19) to FY21, contributing a net profit of RM50 million annually.

The last time the government had a rehiring programme for incoming foreign workers (IFWs) in West Malaysia was in February to December 2017. Three companies were appointed to register the IFWs — MyEG, Iman Resources Sdn Bhd and Bukti Megah Sdn Bhd. They received RM100 for every IFW registered. If another rehiring programme starts in West Malaysia, we believe MyEG stands a good chance to again handle part of the IFW registrations. We have not assumed any potential earnings from registration of IFWs for MyEG.

Over the past two years, the company has exported its online services to countries like the Philippines and Indonesia. Results are paying off as its overseas operations broke even last year and should be profitable from this year. What could be a game changer for MyEG’s overseas operations is finalising Bangladesh’s value added tax monitoring system. We have not assumed any potential earnings from this project.

We maintain our forecasts and TP of RM1.96, based on 21 times FY20 forecast price-earnings ratio (PER), a 40% premium to the technology sector’s 2020 forecast target PER of 15 times. The premium is to reflect the strong earnings growth potential of its overseas operations over the next few years. The stock remains an “add”. Potential rerating catalysts are stronger-than-expected overseas profits, while failure to match NFWs in Malaysia this year is a key downside risk. — CGSCIMB Research, April 11