MyEG’s earnings growth to be driven by GSTM deal

This article first appeared in The Edge Financial Daily, on April 10, 2018.
MyEG’s earnings growth to be driven by GSTM deal
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MyEG Services Bhd
(April 9, RM2.63)
Downgrade to hold with an unchanged target price (TP) of RM3:
MyEG Services Bhd’s share price has outperformed both the FBM KLCI and the KLSE Technology Index so far this year. Year to date (YTD), the stock has risen more than 30% versus FBM KLCI’s 3% to 4% gain and KLSE Technology Index’s 23.6% decline. We believe the latter’s sharp decline YTD was mainly due to the fact that most technology companies’ export revenues are in US dollars and the ringgit has been strengthening against the greenback over the past few months.

With the registration of illegal foreign workers (IFWs) completed at the end of last year, we expect MyEG’s earnings growth to be driven by the Goods and Services Tax Monitoring (GSTM) project over the next one to three years. Under the project, it gets RM1,000 per annum (p.a.) from the government for every outlet installed with its dongles (attached to cash registers). The goal of Phase 1 is to install dongles in 50,000 food and beverage (F&B) outlets nationwide. We understand it had made the installation in over 20,000 F&B outlets in the Klang Valley, with the rest to be done in the second half of 2018 (2H18).

GSTM Phase 2 should be a major cash cow for the company. GSTM Phase 2, which would involve the retail sector, would see an estimated 500,000 retail outlets linked to the GSTM project and MyEG would also receive RM1,000 per outlet annually. On full installation of Phase 2, MyEG gets RM500 million annually. Assuming a 20% to 25% profit before tax (PBT) margin, Phase 2 should contribute RM100 million to RM125 million PBT annually to the company. We have assumed GSTM Phase 2 to start from mid-2018F.  

In January, MyEG received the approval from Bank Negara Malaysia to issue electronic money. When GSTM Phases 1 and 2 are in place, the retail and F&B sector would be fully linked to the GSTM network. We believe MyEG would be able to derive some synergy from linking its electronic money to retail and F&B outlets nationwide. We have not assumed any potential earnings from the electronic money licence yet.

We maintain our earnings per share (EPS) forecasts and TP, based on 25.2 times 2019 forecast price-earnings ratio, a 20% premium to the technology sector. The premium is to reflect its large market capitalisation and strong 36% calendar year 2018 (CY18) to CY20 forecast EPS compound annual growth rate (CAGR). However, there could be earnings disappointment for the company if there are any delays in the launch of GSTM Phase 2, targeted to start in mid-2018F.  

We downgrade the stock from an “add” to “hold”, our first downgrade since we upgraded it to an “add” from “hold” on April 28, 2014. We believe at the current share price level, most of the good news has already been reflected in its share price and we do not see any positive catalyst surprises over the next few months. An upside risk is the successful launch of GSTM Phase 2, while a downside risk is a delay in the launch. — CGSCIMB Research, April 9