My EG Services Bhd
(Dec 8, RM4.25)
Maintain add with an unchanged target price of RM5.28. Last evening, MyEG announced that it has finally secured the letter of award (LoA) from the Royal Malaysia Custom Department to undertake the customs service tax monitoring (CSTM) project. The CSTM project should start full commercial service within one month, in line with our earlier forecast that CSTM starts its full commercial service by January 2015.

 Although this approval announcement was not a complete surprise, it was nevertheless a relief that the LoA has finally been received after such a long delay. Our earnings forecasts from the CSTM are conservative. We are looking at 60,000 outlets in financial year 2015 (FY2015) (phase 1), 100,000 outlets in FY2016 (phase 1) and rising to 200,000 outlets in FY2017 (phase 1 and part of phase 2). We have only assumed a conservative additional 100,000 outlets from CSTM phase 2 (retail sector) in FY2017. If CTSM phase 2 takes off faster than expected, FY2016 to FY2017 net profit could be much higher than expected. MyEG targets a total 500,000 outlets under CSTM phase 2 (retail sector).

Remain invested in the stock. With the final CSTM approval in hand, MyEG’s share price should see an upward rerating over the next few weeks. Its proposed road safety diagnostic system (RSDS) project could also positively surprise in 2015. In July 2014, the authorities made it mandatory for all commercial buses to instal a road safety diagnostic kit over the next 12 months. If MyEG can capture 25% to 30% market of both the commercial bus and lorry industry insurance premiums, it could collect around RM58 million to RM75 million insurance commission annually. Assuming a 40% net profit margin, RSDS could contribute RM23 million to RM30 million net profit annually to MyEG’s bottom line. We have not assumed any potential earnings from RSDS. — CIMB Research, Dec 8

This article first appeared in The Edge Financial Daily, on December 9, 2014.