This article first appeared in The Edge Financial Daily on October 30, 2018
My E.G. Services Bhd
(Oct 29, RM1.13)
Upgrade to buy with a target price (TP) of RM1.62: Last Friday, My E.G. Services Bhd (MyEG) announced the second tranche of 50 million shares or 1.4% of MyEG’s issued and paid-up capital were sold by its largest shareholder, Asia Internet Holdings, in which Wong Thean Soon and Datuk Dr Norraesah Mohamad are beneficial shareholders. However, the underlying reason for the disposal of shares, as stated in the announcement, is pursuant to a financing arrangement, as opposed to market talks that it was taken up by a strategic investor. The buyer had yet to be revealed.
While the recruitment service started in July after the expiry of the matching service for an amnesty programme and repealing the middleman system in the new foreign worker hiring space, earnings contribution is only expected to come in starting November as the government is approving the first batch of applications submitted by MyEG. Our channel checks indicate thousands of applications have been submitted since the recruitment service’s inception. Note that some 300,000 to 500,000 new foreign workers are recruited annually in Malaysia and MyEG intends to achieve a minimum 30% market share (taking reference from its insurance take-up rate when it was initially rolled-out).
We deemed the new foreign worker levy system will not hinder the take-up rate of foreign workers in Malaysia as many companies are still facing a shortage of workers after the 14th general election (GE14), as the government has frozen all intake of new foreign workers in an effort to recalibrate the hiring system. Understandably, the quantum of the increment would be around 20% compared with the present levy depending on different sectors.
MyEG is announcing its fifth-quarter financial year 2018 (5QFY18) results at end-November and we expect the results to be relatively muted as the post-GE14 impact still reverberates (a reduction in the number of foreign worker-related services processed). Note that MyEG has changed its financial year estimates from June to September, resulting in the five-quarter FY18. This is to enable MyEG to potentially recognise an impairment of its goods and services tax (GST) monitoring devices amounting to approximately RM150 million in 5QFY18 since there is no related resolution made by the government on the tax monitoring. If the government decides to continue with the programme, the deployment’s scope would be significantly reduced under the new sales and services tax (SST) system. While the same devices can be potentially deployed in the Philippines where MyEG is making strong headways, the company may still exercise prudence to impair the devices’ carrying values.
There is no earnings revision or risk. We upgrade to a “buy” (from “hold”) call with an unchanged TP of RM1.62, implying 20 times 2019 forecast price-earnings (PE). Our “upgrade” call is premised on its recent share price retracement. The stock has fallen 47% from its recent high of RM1.79. The approval of the first tranche of recruitment applications for foreign workers could serve as a small catalyst for the company. — UOB Kay Hian, Oct 29